1
PART I
TITLE IX
PARTNERSHIP
(Arts. 1767-1867)
INTRODUCTION
Brief historical background.
(1) Development of partnership. — The earliest form of
conducting business was the single entrepreneur ownership plan
whereby one individual owned the business, had sole control of
the same, reaped all the profits, and suffered all the losses. Under
this system, the growth of an individual business was limited,
owing especially to the limitation of capital and sometimes also
to the limitation of skill or knowledge. To permit combinations
of capital, or capital and experience, and to secure economy by
eliminating some of the overhead costs of individual enterprises,
the partnership plan of business association was developed. The
partnership may be traced back to ancient history. (T.S. Kerr,
Business Law: Principles and Cases, 2nd ed., p. 705.)
(2) Ancient origin of partnership as a business organization. —
Development, as distinguished from origin, of the partnership
as a form of business organization, is often credited to the
Romans. They found in this form of business organization a
means whereby the capital, goods, talents, and credit of two or
more individuals might best be combined to carry on a trade
or business. Such trade or business might well have been, and
frequently, was too large an undertaking for a single individual.
1
2
PARTNERSHIP
(a) Historically, the partnership as a business organization was used long before the Romans. As early as 2300 B.C.,
Hammurabi, the famous king of Babylon, in his compilation
of the system of laws of that time, provided for the regulation
of the relation called partnership. Commercial partnerships
of that time were generally for single transactions or undertakings.
(b) Following the Babylonian period, we find clear-cut
references to partnerships in Jewish law. In this connection,
however, it must be remembered that the ancient Jews were a
pastoral people, and, therefore, the partnership as a business
organization under Jewish law was concerned with the
holding of title to land by two or more persons. The Jewish
word “shutolin” was used to designate this joint ownership
of land. Subsequently, this same word was used to denote the
partnership relation.
(3) The relative newness of the law of partnership.1 — The
partnership as a form of business organization has had a very
long history of use. This would suggest that there would be a
correspondingly long line of precedents and decisions dealing
with this subject. Such is not the case. The explanation for this
situation is both clear and understandable. For at least a century
after the partnership as a business organization had been well
and generally established in British commerce, the English
courts of justice had scarcely dealt with this subject. The fact is
that disputes between merchants were considered and disposed
of by special courts.
1
Blackstone’s commentaries on the law which first appeared in 1765, do not contain any discussion on business partnerships. The fact is that partnerships did not have
an early start in England. They began in the trading nations of Holland and Italy. The
English law of partnerships is an ill-assimilated mixture of Roman Law, of the Law of
Merchants, and of the Common Law of England. (Charles W. Gerstenberg, “Organization and Control” [1919], 3 Modern Business, p. 36.) One should not be surprised to learn,
therefore, that the development of the law of partnership in England and the United
States, was accompanied with so much confusion and uncertainty that demands for statutory uniformity arose. The result in England was Act of 1800, and in the United States,
the Uniform Partnership Act and the Uniform Limited Partnership Act. (Wyatt & Wyatt,
Business Law Principles and Cases [1963], p. 597.)
INTRODUCTION
3
These special courts were commonly known as Courts Staple,
Admiralty Courts, and Courts of Piepoudre.
(a) The law of merchants. — This subheading might well
be taken to indicate that merchants had a special and peculiar
kind of law that was applicable to them and their legal affairs.
In fact, such was the case during the Middle Ages. During
this time, there were numerous periods of rather intense
commercial activity. In England, this activity was centered on
so-called fairs or staples at which were gathered merchants
from many countries seeking to sell their goods. Partnerships
flourished during these periods of activity.
During this same period, the common law courts of
England were thought to be celebrated for their slowness and
their methodical exactness of form. The merchants moved
more rapidly than the law and they required that justice
be more speedy and that it be in general accord with their
customs. This background and need gave rise to the special
courts mentioned above.
(b) English law of partnership. — In time, the use of these
special courts was discontinued and their functions were taken
over by the law courts. During his term as Chief Justice, Lord
Mansfield sought to establish a common law for commercial
matters. His efforts were directed toward establishing and
defining the customs of merchants and supplementing this
body of law with the applicable principles of the civil law. It
was not until the latter years of the 18th century that the law
of partnership as we know it today began to assume both
form and substance.
In 1778, Lord Mansfield decided the case of Fox vs. Hanbury (2 Cowp. 445, 98 Eng. Rep. 1179 [1776].) which dealt with
the relative rights of partners as well as the rights of partnership and separate creditors so far as partnership property
was concerned. In 1794, William Watson wrote a text on the
subject of partnership. (William Watson, Partnership, London [1794].)
(c) Beginning of law of partnership. — These two sources,
speaking most generally, may be said to mark the beginning
4
PARTNERSHIP
of printed precedents and the publication of the principles
of law applicable to partnerships. The increased use of the
partnership as a business organization, together with the
increase in the complexity of business, generally has brought
forth a rapid succession of decisions involving the law of
partnerships.
(4) American Uniform Acts. — As in the case of sales and
negotiable instruments, an attempt has been made to secure
uniformity in the United States of state laws dealing with
partnership.
The Uniform Partnership Act and the Uniform Limited Partnership Act have been of the utmost importance in helping to
achieve uniformity of decisions in this particular field of law. The
National Conference of Commissioners on Uniform State Laws
first commenced its work in the field of partnership in 1902. It
was not until the fall of 1914 that the Conference finally agreed
upon a draft of a Uniform Partnership Act that was recommended to the legislative bodies of the several states for adoption.
The Commissioners’ Prefatory note is quoted in part:
“It is, however, proper here to emphasize the fact that
there are other reasons in addition to the advantages which
will result from uniformity x x x. There is probably no other
subject connected with our business law in which greater
instances can be found where, in matters of daily occurrence,
the law is uncertain. This uncertainty is due not only to
conflict between the decisions of different states but more to
the general lack of consistency in legal theory, x x x making
the actual administration of the law difficult and often
inequitable.
Another difficulty of the present partnership law is the
scarcity of authority of matters of considerable importance
in the daily conduct and in the winding up of partnership
affairs. In any one state, it is often impossible to find an
authority on a matter of comparatively frequent occurrence,
while not infrequently, an exhaustive research of the reports
of the decisions of all the states and the federal courts fails to
reveal a single authority throwing light on the question.”
INTRODUCTION
5
The Uniform Partnership Act that was approved for adoption
by the several states in October of 1914 has many points of
similarity with the Partnership Act (English) of 1890. For this
reason, the practical operation of the Uniform Partnership Act
has a background of application in the workings of the English
Act. (see Barrett & Seago, Partners and Partnership Law and
Taxation, Vol. 1, pp. 1-17.) To be sure, English settlers brought the
partnership concept to their new country as part of the common
law.
In fine, modern partnership law may be said to contain a
combination of principles and concepts developed from three
sources: the Roman law, the law merchant and equity, and the
common law courts.
Governing law in our jurisdiction.
Before the new Civil Code (R.A. No. 386.) took effect on
August 30, 1950 (Lara vs. del Rosario, 94 Phil. 778; Aznar vs.
Garcia, 102 Phil. 1055.), commercial or mercantile partnerships
were governed by the Code of Commerce (Arts. 116-238.) and
non-commercial or civil partnerships by the old Spanish Civil
Code. (Arts. 1665-1708.)
The new Civil Code superseded the old Civil Code. It expressly
repealed in toto the provisions of the Code of Commerce relating
to partnerships. (Art.* 2270[2].) Consequently, the provisions
of Title IX, from Article 1767 to Article 1867, are intended to
provide all the rules regarding partnerships, supplemented by
other provisions of the Civil Code, insofar as they are applicable,
particularly those on contracts and agency. There is no more
distinction between commercial and civil partnerships.
The partnerships contemplated are those formed for private
interest or purpose. (Art. 45, last par.)
Sources of our law on partnership.
The Civil Code provisions on partnership were mostly taken,
with or without modifications, from the old Civil Code and from
*Unless otherwise indicated, refers to article in the Civil Code.
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PARTNERSHIP
two American statutes, namely: the Uniform Partnership Act
and the Uniform Limited Partnership Act.
In regard to the adoption of provisions of the Uniform
Partnership Act and the Uniform Limited Partnership Act, the
Code Commission which drafted the new Civil Code, has this to
say:
“Rules from these two Uniform Acts have been incorporated into the proposed Civil Code because there are numerous gaps in our present law on these two subjects. Moreover,
these American statutes are more in keeping with modern
business practices. (Report of the Code Commission, p. 67.)
New rules were adopted from the Uniform Partnership
Act (i.e., Arts. 1769, 1774, 1785, 1787, 1805 to 1807, 1809, 1810
to 1814, 1819 to 1826) and from the opinions of civilians
(i.e., Arts. 1789, 1791). Some provisions were taken from the
Code of Commerce. (Arts. 1789, 1808.) New Rules were also
formulated by the Commission (i.e., Arts. 1768, 1770, par. 2,
1772, 1790, 1815.)
Many provisions were amended for clarification or
improvement.” (Ibid., p. 149.)
— oOo —
7
Chapter 1
GENERAL PROVISIONS
ARTICLE 1767. By the contract of partnership two
or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership
for the exercise of a profession. (1665a)
Concept of partnership.
The above article gives the legal definition of partnership
(often called “co-partnership”) from the viewpoint of a contract.
There are, however, other definitions. Thus:
(1) “A partnership is a contract of two or more competent
persons to place their money, effects, labor and skill, or some or
all of them, in lawful commerce or business and to divide the
profits and bear the losses in certain proportions.” (40 Am. Jur.
126, 474; 68 C.J.S. 398.)
(2) “A partnership is an association of two or more persons
to carry on as co-owners of a business for profit.” (Uniform
Partnership Act, Sec. 6.)
(3) “A partnership is a legal relation based upon the express or
implied agreement of two or more competent persons whereby
they unite their property, labor or skill in carrying on some lawful
business as principals for their joint profit.” (Mechem, Elements
of the Law of Partnership [1923], p. 1.)
(4) “A partnership is the status arising out of a contract
entered into by two or more persons whereby they agree to share
as common owners the profits of a business carried on by all or
7
8
PARTNERSHIP
Art. 1767
any of them on behalf of all of them.” (31 Words and Phrases
[1957 ed.], p. 291.)
(5) “A partnership is an organization for production of income
to which each partner contributes one or both of the ingredients
of income, which are capital or service.” (Ibid., p. 292.)
(6) “A partnership is an entity, distinct and apart from the
members composing it, and, for the purpose of which it was
created, it is a person having its own assets and liabilities and
any benefit or liability attaching to a member of the partnership,
results from the partnership relation.” (Ibid., p. 293.)
(7) “A partnership is a joint undertaking to share in the profit
and loss.” (Eastman vs. Clark, 53 N.H. 276, 16 Am. Rep. 192.)
Partnership is a legal concept, but the determination of the
existence of a partnership may involve inferences drawn from
an analysis of all the circumstances attending its creation and
operation. (68 C.J.S. 399; see Art. 1769.) As a form of business
organization, it falls between two extremes of organizational
form — the single proprietorship and the corporation.
Civil law concept and American concept
of partnership distinguished.
(1) Basis of concept. — While the Civil Code speaks of a
partnership as a contract, the American concept of a partnership
is that of a relation. The difference, however, is more apparent
than real, because Article 1767 considers the term as the
agreement itself out of which a partnership is created, while the
Anglo-American idea of partnership is based on the result of the
contract or agreement of the parties creating the partnership, that
is, the juridical relation growing out from the express or implied
agreement of the parties to create a partnership. (Phil. Law of
Partnerships, by A. Espiritu and E. Sibal [1937], p. 2.)
(2) Possession of separate personality. — It is a basic tenet of
the Spanish and Philippine law that a partnership has a juridical
personality of its own, distinct and separate from that of each of
the partners. (Art. 1768.) The American and English law does not
recognize such separate juridical personality (Commissioner of
Internal Revenue vs. Suter and Court of Tax Appeals, 27 SCRA
Art. 1767
GENERAL PROVISIONS
9
152 [1969].), a partnership being considered merely an extension
of its members, although some states of the Union classify the
partnership as a legal entity.
The Uniform Partnership Act has in this respect codified the
“aggregate theory” of partnership more than it has the “entity
theory” or Roman Law theory of partnership.1 Unlike a corporation, a partnership is generally regarded as a conglomerate of individuals, “an association of two or more persons”2 and as such
does not pay federal or state income taxes (although for purposes of information it is required to file a partnership tax return).
The individual members of the partnership severally pay their
income taxes, the partnership business being regarded merely as
a source of income. (L. Teller, Law of Partnerships, 1949 ed., p. 6.)
In our jurisdiction, partnerships, except general professional
partnerships, are treated for income tax purposes as corporations
and subject to tax as such. (Secs. 20[b], 24[a], Pres. Decree No.
1158 [National Internal Revenue Code], as amended.)
General professional partnership.
Paragraph 2 relates to the exercise of a profession. A profession
has been defined as “a group of men pursuing a learned art as a
common calling in the spirit of public service — no less a public
service because it may incidentally be a means of livelihood.” (In
the Matter of the Petition for Authority to Continue Use of Firm
Name “Sycip, Salazar, etc.’’/”Ozaeta, Romulo, etc.,” 92 SCRA 1
[1979], citing Dean Pound.)
Strictly speaking, the practice of a profession is not a business
or an enterprise for profit. However, the law allows the joint
pursuit thereof by two or more persons as partners.3 (see Art.
At common law, a partner could maintain no action against his partnership at law.
Since a partnership is conceived as an aggregate of individuals, rather than an entity existing apart from its individual members, a partner by suing a partnership of which he is
a member, would be suing himself, and a judgment could not possibly be obtained both
in behalf of and against a person at the same time. (L. Teller, op. cit., p. 81.)
2
The contracting parties are called “partners” and the association is called “firm.”
3
For tax purposes, the National Internal Revenue Code (Sec. 20[b], Pres. Decree No.
1158, as amended.) defines general professional partnerships as those “formed by persons for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.’’
1
PARTNERSHIP
10
Art. 1767
1783.) In such case, it is the individual partners, and not the
partnership, who engage in the practice of the profession and are
responsible for their own acts as such.
The law does not allow individuals to practice a profession
as a corporate entity. Personal qualifications for such practice
cannot be possessed by a corporation.
Partnership for the practice of law.
(1) A mere association for non-business purpose. — The right to
practice law is not a natural or constitutional right but is in the
nature of a privilege or franchise. A partnership for the practice
of law cannot be likened to partnerships formed by other professionals or for business.4
It is not a partnership formed for the purpose of carrying on
(33) Partnership Names. — Partnerships among lawyers for the practice of their profession are very common and are not to be condemned. In the formation of partnerships
and the use of partnership names, care should be taken not to violate any law, custom,
or rule of court locally applicable. Where partnerships are formed between lawyers who
are not all admitted to practice in the courts of the state, care should be taken to avoid
any misleading name or representation which would create a false impression as to the
professional position or privileges of the member not locally admitted.
In the formation of partnerships for the practice of law, no person should be admitted or held out as a practitioner or member who is not a member of the legal profession
duly authorized to practice, and amenable to professional discipline. In the selection and
use of a firm name, no false, misleading, assumed, or trade names should be used. The
continued use of the name of a deceased or former partner, when permissible by local
custom, is not unethical but care should be taken that no imposition or deception is practiced through this use. When a member of the firm, on becoming a judge, is precluded
from practicing law, his name should not be continued in the firm name.
Partnerships between lawyers and members of other profession or non-professional
persons should not be formed or permitted where any part of the partnership’s employment consists of the practice of law. (Canons of Professional Ethics.)
Note: The Code of Ethics which was adopted by the American Bar Association in
1908, was also adopted by the Philippine Bar Association in 1917 (Canons 1 to 32) and
in 1946 (Canons 33 to 47). In the cited case of “SyCip, Salazar, etc.,’’ the Supreme Court
ruled that “in the Philippines, no local custom permits or allows the continued use of a
deceased or former partner’s name in the firm names of law partnership.’’ Even if such
custom is proven, it cannot prevail against “its Resolution directing lawyers to desist
from including the names of deceased partners in their firm designation. This is not to
speak of our civil law (Art. 1830.) which clearly ordains that a partnership is dissolved by
the death of any partner.’’
Rule 3.02 of the Code of Professional Responsibility approved and promulgated by
the Supreme Court on June 21, 1988 in effect abandoned the ruling in the SyCip case. (see
Art. 1815.)
4
Art. 1767
GENERAL PROVISIONS
11
trade or business or of holding property. Thus, the use of a nom
de plume, assumed, or trade name in law practice is improper.
(2) Distinguished from business. — The practice of law is intimately and peculiarly related to the administration of justice
and should not be considered like an ordinary “money-making
trade.’’
The primary characteristics which distinguish the legal profession from business are the following:
(a) A duty of public service, of which the emolument is
a by-product, and in which one may attain the highest eminence without making much money;
(b) A relation as an “officer of court” to the administration of justice involving thorough sincerity, integrity, and
reliability;
(c) A relation to clients in the highest fiduciary degree;
and
(d) A relation to colleagues at the bar characterized by
candor, fairness, and unwillingness to resort to current
business methods of advertising and encroachment on their
practice, or dealing directly with their clients. (In the Matter
of the Petition for Authority to Continue Use of Firm Name
“SyCip, Salazar, etc.’’/”Ozaeta, Romulo, etc.,” 92 SCRA 1
[1979], citing H.S. Drinker, Legal Ethics [1953], pp. 4-5.)
Characteristic elements of partnership.
The contract of partnership is:
(1) Consensual, because it is perfected by mere consent, that is,
upon the express or implied agreement of two or more persons;
(2) Nominate, because it has a special name or designation in
our law;
(3) Bilateral, because it is entered into by two or more persons
and the rights and obligations arising therefrom are always
reciprocal;
(4) Onerous, because each of the parties aspires to procure for
himself a benefit through the giving of something;
12
PARTNERSHIP
Art. 1767
(5) Commutative, because the undertaking of each of the
partners is considered as the equivalent of that of the others;
(6) Principal, because it does not depend for its existence or
validity upon some other contracts; and
(7) Preparatory, because it is entered into as a means to an
end, i.e., to engage in business or specific venture for the realization of profits with the view of dividing them among the contracting parties.
A partnership contract, in its essence, is a contract of agency.
(see Art. 1818.)
Essential features of partnership.
The following are the essential features of a partnership
contract:
(1) There must be a valid contract;
(2) The parties (two or more persons) must have legal
capacity to enter into the contract;
(3) There must be a mutual contribution of money, property,
or industry to a common fund;
(4) The object must be lawful; and
(5) The primary purpose must be to obtain profits and to
divide the same among the parties.
It is also required that the articles of partnership must not be
kept secret among the members; otherwise, the association shall
have no legal personality and shall be governed by the provisions
of the Civil Code relating to co-ownership. (Art. 1775.)
Existence of a valid contract.
(1) Partnership relation fundamentally contractual. — Partnership is a voluntary relation created by agreement of the parties.
It excludes from its concept all other associations which do not
have their origin in a contract, express or implied. There is no
such thing as a partnership created by law or by operation or implication of law alone. Religious societies, conjugal partnerships,
Art. 1767
GENERAL PROVISIONS
13
and others of a similar nature are not, therefore, included as they
are not created by the express or implied contract of the parties.
Actually, the partnership relation is not the contract itself, but
the result of the contract.
(a) Form. — The relation is evidenced by the terms
of the contract which may be oral or written, express or
implied from the acts and declarations of the parties, subject
to the provisions of Articles 1771 to 1773 and to the Statute
of Frauds. (infra.) Thus, an election to become a member
of a partnership was held sufficient to render a member a
“partner,” there being no necessity that the member should
sign any articles of partnership. (Montgomery vs. Busyrus
Machine Works, 92 U.S. 257; 31 Words and Phrases, 272.)
(b) Articles of Partnership. — While the partnership
relation may be informally created and its existence proved
by manifestations of the parties, it is customary to embody
the terms of the association in a written document known as
“Articles of Partnership”5 stating the name, nature or purpose
and location of the firm, and defining, among others, the
powers, rights, duties, and liabilities of the partners among
themselves, their contributions, the manner by which the
profits and losses are to be shared, and the procedure for
dissolving the partnership.
(c) Requisites. — Since partnership is fundamentally
contractual, all the essentials of a valid contract must be
present. Under the law, the following requisites must concur:
1) Consent and capacity of the contracting parties; 2) Object
which is the subject matter of the contract; and 3) Cause
which is established.6 (Art. 1318.)
5
J.A. Crane, Handbook on the Law of Partnerships and Other Unincorporated Associations, 2nd ed. (1952), p. 99.
6
The object of a contract may be a thing, right, or service. (Arts. 1347, 1348.) In a partnership contract, which is an onerous contract (see Art. 1350.), the cause is the prestation
or promise of the other partner or partners to contribute money, property, or industry to a
common fund, while the subject matter includes the contributions of the partners and the
business or specific undertaking which the parties have agreed to pursue for purposes
of profit.
PARTNERSHIP
14
Art. 1767
Obviously, a person cannot enter into a contract of partnership
solely with himself; there must be at least two competent parties.
As in other cases of contracts, in order to make an agreement
for a partnership valid, there must be a valid consideration
existing as between the partners. Each partner surrenders to the
partnership an interest in his property, labor, skill, or energy,
in accordance with the express or implied stipulations of their
mutual agreement. (40 Am. Jur. 141.)
EXAMPLE:
A bought a secondhand car. He told B that he would give
B half the profit of its sale if B would repair the car. B did not
repair the car. A hired C to do the work and later sold the car at
a profit. Obviously, B is not entitled to any of the profit. There
was no partnership between A and B because of the absence of
consideration for A’s promise.
ILLUSTRATIVE CASE:
Action seeks to compel the execution of a partnership contract.
Facts: A and B entered into an agreement to form a partnership. Because of A’s refusal to comply with the agreement,
B brought an action to compel the execution of a partnership
contract.
Issue: May A be compelled against his will to carry out the
agreement or execute the partnership papers?
Held: No. Under Article 1167,7 A has an obligation to do,
not to give. The law recognizes the individual’s freedom or
liberty to do an act as he has promised to do, or not to do it,
as he pleases. It falls within what Spanish commentators call a
very personal act (acto personalismo), of which courts may not
compel compliance, as it is considered an act of violence to do
so. (Woodhouse vs. Halili, 83 Phil. 526 [1953].)
Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be undone.
(1098)
7
Art. 1767
GENERAL PROVISIONS
15
(2) Partnership relation fiduciary in nature. — Partnership is a
form of voluntary association entered into by the associates. It
is a personal relation in which the element of delectus personae8
exists, involving as it does trust and confidence between the
partners.
(a) Right to choose co-partners. — Unless otherwise
provided in the partnership agreement, no one can become
a member of the partnership association without the consent
of all the other associates. The fiduciary nature of the
partnership relation and the liability of each partner for the
acts of the others within the scope of the partnership business
(Art. 1818.) require that each person be granted the right to
choose with whom he will be associated in the firm.
(2) Power to dissolve partnership. — Neither would the
presence of a period for its specific duration or the statement
of a particular purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. (see
Art. 1830[2].) Among partners, mutual agency arises and the
doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the partnership.
Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith
can prevent the dissolution of the partnership but that it can
result in a liability for damages. (Ortega vs. Court of Appeals,
245 SCRA 529 [1995]; Tocao vs. Court of Appeals, 342 SCRA
20 [2000].)
(3) Application of principles of estoppel. — A partnership
liability may be imposed upon a person under principles of
This Latin phrase, sometimes written delectus personarum which is the plural of the
phrase, may be literally translated — choice of the person or choice of the persons. (Barret
& Seago, op. cit., p. 25.) It is because of this delectus personae that the law gives such wide
authority to one partner, to bind another by contract or otherwise. (Teller, op. cit., p. 10.)
It is so unnatural that one party should give another wide authority to make contracts,
incur obligations, possibly commit binding torts, pledge personal credit, without first
ascertaining the character of that individual. Where such choice of person is lacking, the
law presumes a lack of partnership. (Ibid., p. 16.)
This element of delectus personae, however, is true only in the case of a general partner, but not as regards a limited partner. (see Art. 1866.)
8
16
PARTNERSHIP
Art. 1767
estoppel where he holds himself out, or permits himself to be
held out, as a partner in an enterprise. (see Art. 1825.) In such
cases, there is no actual or legal partnership relation but merely
a partnership liability imposed by law in favor of third persons.
(40 Am. Jur. 137; see Art. 1825.)
A partnership may be created without any definite intention to create it. It is the substance and not the name of the arrangement, which determines the legal relationship, although
the designation adopted by the parties should be considered as
indicative of their intention. (68 C.J.S. 415-417.) In case there is no
written agreement between the parties, the existence or non-existence of a partnership must be determined from the conduct of
the parties, any documentary evidence bearing thereon, and the
testimony of the parties. (Greenstone vs. Clar. [Misc.], 69 N.Y.S.
[2d] 548 [1947], cited in Barrett & Seago, p. 461.)
Legal capacity of the parties to enter
into the contract.
(1) Individuals. — Before there can be a valid contract of
partnership, it is essential that the contracting parties have the
necessary legal capacity to enter into the contract. As a general
rule, any person may be a partner who is capable of entering into
contractual relations. Consequently, any person who cannot give
consent to a contract cannot be a partner. Hence, the following
cannot give their consent to a contract of partnership:
(a) Unemancipated minors;9
(b) Insane or demented persons;
(c) Deaf-mutes who do not know how to write;
(d) Persons who are suffering from civil interdiction; and
9
Art. 234. Emancipation takes place by the attainment of majority. Unless otherwise
provided, majority commences at the age of 18 years.
Emancipation takes place:
(1) By the marriage of the minor; or
(2) By recording in the Civil Register of an agreement in a public instrument
executed by the parents exercising parental authority and the minor at least eighteen
years of age. Such emancipation shall be irrevocable. (Family Code)
Art. 1767
GENERAL PROVISIONS
17
(e) Incompetents who are under guardianship. (see Arts.
1327, 1329; Art. 34, Revised Penal Code; Rules 93-94, Rules of
Court.)
Under Article 1782, persons who are prohibited from giving
each other any donation or advantage cannot enter into a
universal partnership.10
A married woman may enter into a contract of partnership
even without her husband’s consent, but the latter may object
under certain conditions.11
(2) Partnerships. — There is no prohibition against a partnership being a partner in another partnership. When two or more
partnerships combine with each other (or with a natural person
or persons) creating a distinct partnership, say, partnership X, all
the members of the constituent partnerships will be individually
liable to the creditors of partnership X.
(3) Corporations. — The doctrine adopted by our Supreme
Court is that, unless authorized by statute or by its charter,
a corporation is without capacity or power to enter into a
contract of partnership.12 (Mendiola vs. Court of Appeals, 497
SCRA 346 [2006]; J.M. Tuason vs. Bolanos, 95 Phil. 106 [1954]; 68
C.J.S. 408.) This limitation, it is said, is based on public policy,
Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the
spouses may give each other on the occasion of any family rejoicing. The prohibition
shall also apply to persons living together as husband and wife without a valid marriage.
(Ibid.)
11
Art. 73. Either spouse may exercise any legitimate profession, occupation, business
or activity without the consent of the other. The latter may object only on valid, serious
or moral grounds.
In case of disagreement, the court shall decide whether or not:
(a) The objection is proper, and
(b) Benefit has accrued to the family prior to the objection or thereafter. If the benefit accrued prior to the objection, the resulting obligation shall be enforced against the
separate property of the spouse who has not obtained consent.
The foregoing provision shall not prejudice the rights of creditors who acted in good
faith. (Ibid.)
12
The Uniform Partnership Act (supra.) expressly allows corporations to become
partners. (Sec. 2 thereof.) There seems to be no fundamental reason why a corporation
should not be allowed to enter into a contract of partnership where adequate safeguards
and conditions are imposed for the protection of the rights of stockholders and corporate
creditors.
10
18
PARTNERSHIP
Art. 1767
since in a partnership the corporation would be bound by the
acts of persons who are not its duly appointed and authorized
agents and officers, which would be entirely inconsistent with
the policy of the law that the corporation shall manage its own
affairs separately and exclusively. (13 Am. Jur. par. 823; see Sec.
23, B.P. Blg. 68.)
(a) A corporation, however, may enter into joint venture13
partnership with another where the nature of the venture
is in line with the business authorized by its charter. (J.M.
Tuazon & Co., Inc. vs. Bolanos, supra.; Aurbach vs. Sanitary
Wares Manufacturing Corporation, 180 SCRA 130 [1989].)
(b) Where the partnership agreement provides that the
two partners will manage the partnership so that the management of corporate interest is not surrendered, the partnership may be allowed. (SEC Opinion, Dec. 22, 1966.)
(c) Where the entry of the foreign corporation as a limited partner in a limited partnership (Chap. 4.) is merely for
investment purposes and it shall not take part in the management and control of the business operation of the partnership, it shall not be deemed “doing business’’ in the Philippines, and hence, it is not required to obtain a license to do
business in the Philippines as required by Sections 123-126
of the Corporation Code. (B.P. Blg. 68.) Such investment is
allowed by and complies with R.A. No. 7042, the Foreign Investment Act. (SEC Opinion, Aug. 6, 1998.)
Contribution of money, property, or industry
to a common fund.
(1) Existence of proprietary interest. — The partners must have
a proprietary interest in the business or undertaking, that is, they
must contribute capital which may be money or property, or their
services, or both, to the common business. The very definition of
partnership in Article 1767 provides for this element. Without
13
A commercial undertaking by two or more persons, differing from a partnership
in that it relates to the disposition of a single lot of goods or the completion of a single
project. Its duration is limited to the period in which the goods are sold or the project is
carried on. (E.L. Kohler, A Dictionary for Accountants, 1975 ed., p. 279; see Art. 1783.)
Art. 1767
GENERAL PROVISIONS
19
the element of mutual contribution to a common fund there can
be no partnership (see Art. 1784.), although its presence is not
necessarily a conclusive evidence of the existence of partnership.
(a) Money. — The term is to be understood as referring
to currency which is legal tender in the Philippines. It must
be pointed out that checks, drafts, promissory notes payable
to order, and other mercantile documents are not money
but only representatives of money. Consequently, there is
no contribution of money until they have been cashed. (Art.
1249.)
(b) Property. — The property contributed may be real
or personal, corporeal or incorporeal. Hence, credit such as
promissory note or other evidence of obligation or even a
mere goodwill may be contributed, as they are considered
property. (see City of Manila vs. Cumbe, 13 Phil. 677 [1909].) It
has been held that a license to construct and operate a cockpit
may be given as a contribution to a partnership. (Balon vs.
Pajarillo, [C.A.] No. 146-R, Nov. 29, 1956.)
(c) Industry. — In the absence of money or property, or in
concurrence with these two, the law permits the contribution
of industry. The word “industry” has been interpreted to
mean the active cooperation, the work of the party associated,
which may be either personal manual efforts or intellectual,
and for which he receives a share in the profits (not merely
salary) of the business. (11 Manresa 273-274.)
The contribution of a partner may be in the three forms
of money, property and industry, or any two or one of them.
A partnership may, therefore, exist even if it is shown that
the partners have not contributed any capital of their own to
a “common fund’’ for the contribution may be in the form of
credit or industry not necessarily cash or fixed assets. (Lim
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317
SCRA 728 [1999].) Note that the law does not specify the kind
of industry that a partner may contribute. (see Evangelista &
Co. vs. Abad Santos, 51 SCRA 416 [1973].) A limited partner
in a limited partnership, however, cannot contribute mere
industry or services. (Art. 1845.)
PARTNERSHIP
20
Art. 1767
The partner contributing his industry or services must,
however, be distinguished from a lessor of services in the
sense that the former is independent of the other partners,
that is, he is not subject to the supervision of the other
partners, while the lessor is under the supervision of the
lessee or employer. (see Espiritu & Sibal, op. cit., p. 4.)
(2) Proof of contribution. — In partnership, proof is necessary
that there be contribution of money, property, or industry to a
common fund with the intention of dividing the income or profits
obtained therefrom. (Tablason vs. Ballozos, [C.A.] 51 O.G. 1966;
see Estanislao, Jr. vs. Court of Appeals, 160 SCRA 830 [1988].)
If the partnership agreement provides simply that one of the
parties is to give and the other is to receive a half interest in the
profits of an enterprise started by the former, without anything
being promised by the latter toward the accomplishment of
its object, no enforceable contract exists, but if the latter takes
part in carrying on the enterprise, and thus subjects himself
to partnership liability to outsiders, he furnishes sufficient
consideration for the former’s promise and acquires all the rights
of a co-partner. (68 C.J.S. 414.)
ILLUSTRATIVE CASE:
Three persons decided to form a corporation which was not
legally formed, and one of them did not directly act on behalf of the
corporation but reaped the benefits of the contract entered into by the
other two.
Facts: On behalf of F Corporation, Chua and Yao entered
into a contract for the purchase of fishing nets and floats
from G Corporation, claiming that they were engaged in a
business venture (fishing business) with petitioner Lim who,
however, was not a signatory to the agreement. A suit was
filed by G Corporation against the three in their capacities as
general partners, on the allegation that F Corporation was a
non-existent corporation as shown by a certification from the
Securities and Exchange Commission.
Issue: Was Lim a partner of Chua and Yao in the fishing
business and may thus be held liable as such for the fishing nets
and floats purchased by them for the use of the partnership?
Art. 1767
GENERAL PROVISIONS
Held: Yes: (1) Partnership formed by Chua, Yao, and Lim. —
“From the factual findings of both lower courts [Regional
Trial Court and Court of Appeals], it is clear that Chua, Yao,
and Lim had decided to engage in a fishing business, which
they started by buying boats worth P3.35 million, financed by
a loan secured from Jesus Lim who was petitioner’s brother.
In their Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of the sale
of the boats, and to divide equally among them the excess or
loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term “common
fund” under Article 1767. The contribution to such fund need
not be cash or fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any loss or profit
from the sale and operation of the boats would be divided
equally among them also shows that they had indeed formed a
partnership.
Moreover, it is clear that the partnership extended not only
to the purchase of the boat, but also to that of the nets and the
floats. The fishing nets and the floats, both essential to fishing,
were obviously acquired in furtherance of their business. It
would have been inconceivable for Lim to involve himself
so much in buying the boat but not in the acquisition of the
aforesaid equipment, without which the business could not
have proceeded.
Given the preceding facts, it is clear that there was, among
petitioner, Chua and Yao, a partnership engaged in the fishing
business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds
from the sales and operations thereof would be divided among
them.’’
(2) Lim was a partner, not a lessor. — “We are not convinced
by petitioner’s argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His
argument allegedly finds support in the Contract of Lease and
the registration papers showing that he was the owner of the
boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this
Court to believe that he consented to the sale of his own boats
to pay a debt of Chua and Yao, with the excess of the proceeds
to be divided among the three of them. No lessor would do what
21
22
PARTNERSHIP
Art. 1767
petitioner did. Indeed, his consent to the sale proved that there
was a pre-existing partnership among all three.
Verily, as found by the lower courts, petitioner entered
into an agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the
upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the
three of the balance remaining after the payment of their loans,
proves beyond cavil that F/B Lourdes, though registered in his
name, was not his own property but an asset of the partnership.
It is not uncommon to register the properties acquired from a
loan in the name of the person the lender trusts, who in this
case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim. We stress that it is unreasonable — indeed,
it is absurd — for petitioner to sell his property to pay a debt he
did not incur, if the relationship among the three of them was
merely that of lessor-lessee, instead of partners.’’
(3) Lim benefited from the transaction. — “There is no dispute
that the respondent, G Corporation, is entitled to be paid for
the nets it sold. The only question here is whether petitioner
should be held jointly liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the
name of the ostensible corporation should be held liable. Since
his name does not appear on any of the contracts and since
he never directly transacted with the respondent corporation,
ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the
nets found inside F/B Lourdes, the boat which has earlier been
proven to be an asset of the partnership. He in fact questions
the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim,
Chua and Yao decided to form a corporation. Although it was
never legally formed for unknown reasons, this fact alone does
not preclude the liabilities of the three as contracting parties
in representation of it. Clearly, under the law on estoppel, on
behalf of a corporation and those benefited by it, knowing it to
be those acting on behalf of a corporation and those benefited
by it, knowing it to be without valid existence, are held liable
as general partners.
Technically, it is true that petitioner did not directly act
on behalf of the corporation. However, having reaped the
Art. 1767
GENERAL PROVISIONS
23
benefits of the contract entered into by persons with whom he
previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of
corporation by estoppel.’’14 (Lim Tong Lim vs. Philippine Fishing
Gear Industries, Inc., 317 SCRA 728 [1999].)
Legality of the object.
The object is unlawful when it is contrary to law, morals, good
customs, public order, or public policy. (Art. 1306.) As in other
kinds of contract, the purpose of a partnership must be lawful
(Art. 1770.) otherwise, no partnership can arise as the contract is
inexistent and void ab initio. (Art. 1409[1].)
Subject to this general limitation on contracts, a partnership
may be organized for any purpose except that it may not engage
in an enterprise for which the law requires a specific form
of business organization, such as banking which, under the
General Banking Law of 2000 (R.A. No. 8791, Sec. 8.), only stock
corporations may undertake.
Instances of unlawful object are: to create illegal monopolies
or combinations in restraint of trade (Art. 185, Revised Penal
Code.); to carry on gambling (Arbes vs. Polistico, 53 Phil. 489
[1929].); to engage in smuggling; to lease furnished apartments
to prostitutes; to prevent competition in bidding for government
contracts; to control the price of a commodity in the interest of its
members, etc. (59 Am. Jur. 2d 947.)
Purpose to obtain profits.
(1) The very reason for existence of partnership. — A partnership
is formed to carry on a business. The idea of obtaining pecuniary
Section 21 of the Corporation Code of the Philippines provides:
“Sec. 21. Corporation by Estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided, however,
That when any such ostensible corporation is sued on any transaction entered by it as
a corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.’’
14
24
PARTNERSHIP
Art. 1767
profit or gain directly through or as a result of the business to be
carried on is the very reason for the existence of a partnership. As
a matter of fact, this element is what distinguishes the contract
of partnership from voluntary religious or social organizations.
(Fernandez vs. De la Rosa, 6 Phil. 671 [1906]; Council of Red Men
vs. Veterans Army, 7 Phil. 685 [1907].) One without any right to
participate in the profits, cannot be deemed as partner since the
essence of partnership is that the partners share in the profits
and losses. (Tacao vs. Court of Appeals, 365 SCRA 463 [2001].)
All that is needed is a profit motive. Hence, even an unprofitable
business can be a partnership provided the goal of the business
is to generate profits.
(2) Need only be the principal, not exclusive aim. — The realization of pecuniary profit, however, by engaging in some business
activity through their joint contributions and efforts need not be
the exclusive aim of a partnership. It is sufficient that it is the
principal purpose even if there are, incidentally, moral, social, or
spiritual ends. (see 11 Manresa 264.) In a partnership, the parties
intend to share the profits in certain proportions.
Sharing of profits.
A partnership is essentially a business enterprise established
for profit.
(1) Not necessarily in equal shares. — Since the partnership is
engaged for the common benefit or interest of the partners (Art.
1770.), it is necessary that there be an intention to divide the
profits among the members, although not necessarily in equal
shares. In the words of the Supreme Court, “there must be a joint
interest in the profits.” (Fernandez vs. De la Rosa, supra.) Without
this sharing of profits, it cannot be said that an agreement of
partnership has been entered into, and exists. (see Art. 1799.)
If all the other elements create a partnership, a stipulation
which excludes one or more partners from any participation in
the profits (or losses) is void. (Art. 1799.)
(2) Not conclusive evidence of partnership. — The sharing in
profits is merely presumptive and not conclusive, even if cogent,
evidence of partnership. There are numerous instances of parties
Art. 1768
GENERAL PROVISIONS
25
who have a common interest in the profits and losses of an enterprise but who are not partners. (Art. 1769.) Thus, if the division
of profits is merely used as a guide to determine the compensation due to one of the parties, such one is not a partner. (see Art.
1769[4].)
Sharing of losses.
(1) Necessary corollary of sharing in profits. — The definition
of partnership under Article 1767 refers to “profits” only and is
silent as to “losses.” The reason is that the object of a partnership
is primarily the sharing of profits, while the distribution of losses
is but a “consequence of the same.” (Espiritu & Sibal, op. cit., p. 2,
citing 11 Manresa 263.) Be that as it may, the right to share in the
profits carries with it the duty to contribute to the losses, if any.
(see Art. 1797.)
In other words, a community in losses is a necessary corollary of a participation in profits, where it is determined that a
partnership exists. (Lyon vs. MacQuarrie, 46 Cal. App. [2d], 119.)
(2) Agreement not necessary. — It is not necessary for the parties to agree upon a system of sharing losses, for the obligation
is implied from the partnership relation but if only the share of
each partner in the profits has been agreed upon, the share of
each in the losses shall be in the same proportion. (Art. 1797, par.
1.)
Generally, a stipulation which excludes one or more partners
from any share in the profits or losses is void. (Art. 1799.)
ART. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)
Partnership, a juridical person.
A partnership is sometimes referred to as a “firm’’ or a
“company,’’ terms that connote an entity separate from its
aggregate individual partners.
26
PARTNERSHIP
Art. 1768
Like the corporation, a partnership duly formed under the
law is a juridical person to which the law grants a juridical
personality separate and distinct from that of each of the
partners. (Art. 44, par. 3.) As an independent juridical person,
a partnership may enter into contracts, acquire and possess
property of all kinds in its name, as well as incur obligations and
bring civil or criminal actions in conformity with the laws and
regulations of its organizations. (Art. 46.)
Thus, in the partnership X & Co., in which A and B are the
partners, there are three distinct persons, namely, the partnership
X & Co., A, and B. As a consequence of the distinct legal personality
possessed by X & Co., it may be declared insolvent even if A and
B are not. (Campos Rueda & Co. vs. Pacific Commercial & Co., 44
Phil. 916 [1923].) It may enter into contracts and may sue and be
sued, it being sufficient that service of summons or other process
be served on any partner (Vargas & Co. vs. Chan, 29 Phil. 446
[1915].); and the death of either A or B is not a ground for the
dismissal of a pending suit against X & Co. (Ngo Tian Tek vs.
Phil. Education Co., 78 Phil. 275 [1947].)
Neither A nor B may sue on a cause of action belonging to X &
Co., in his own name and for his own benefit. X & Co. may sue and
be sued in its firm name or by its duly authorized representative.
(Tai Tong Chuache & Co. vs. Insurance Commission, 158 SCRA
336 [1988]; see Arts. 1800-1803, 1818.) In view of the separate
juridical personality possessed by a partnership, the partners
cannot be held liable for the obligations of the partnership unless
it is shown that the legal fiction of a different juridical personality
is being used for a fraudulent, unfair, or illegal purpose (Aguila,
Jr. vs. Court of Appeals, 316 SCRA 246 [1999].) and except as
provided in Article 1816.
Effect of failure to comply with statutory
requirements.
(1) Under Article 1772. — This article makes it clear that even
in case of failure to comply with the requirements of Article
1772, with reference to the execution of a public instrument
and registration of the same with the Securities and Exchange
Commission in cases when the partnership capital exceeds
Art. 1769
GENERAL PROVISIONS
27
P3,000.00, such partnership acquires juridical personality. (see
Art. 1784.) The law recognizes that in the Philippines, most
partnerships are created with very small capital to engage in
small business and it would be impractical to require that they
appear in a public instrument and be registered as provided in
Article 1772.
(2) Under Articles 1773 and 1775. — However, in the case
contemplated in Article 1773, the partnership shall not acquire
any juridical personality because the contract itself is void. This
is also true regarding secret associations or societies which do
not acquire juridical personality under Article 1775.
To organize a partnership
not an absolute right.
To organize a corporation or a partnership that could claim
a juridical personality of its own and transact business as such,
is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary
to impose.
Thus, it has been held that the State through Congress, and
in the manner provided by law, had the right to enact Republic
Act No. 1180 (Retail Trade Nationalization Law)15 and to provide
therein that only Filipinos may engage in the retail business,
cannot be seriously doubted. The law provides, among other
things, that after its enactment, a partnership not wholly formed
by Filipinos could continue to engage in the retail business
only until the expiration of its term. This provision is clearly
intended to apply to partnerships already existing at the time
of the enactment of the law. Hence, the agreement in the articles
of partnership to extend the terms of its life must be deemed
subject to Republic Act No. 1180 if it was already in force when
the parties came to agree regarding the extension of the original
term of their partnership. (Ang Pue & Co. vs. Sec. of Commerce
and Industry, 5 SCRA 645 [1962].)
15
R.A. No. 8762 (Retail Trade Liberalization Act of 2000) liberalizes the retail trade
business, repealing for this purpose R.A. No. 1180.
28
PARTNERSHIP
Art. 1769
ART. 1769. In determining whether a partnership
exists, these rules shall apply:
(1) Except as provided by article 1825, persons who
are not partners as to each other are not partners as to
third persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or copossessors do or do not share any profits made by the
use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;
(4) The receipt by a person of a share of the profits
of a business is prima facie evidence that he is a partner
in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative
of a deceased partner;
(d) As interest on a loan, though the amount of
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments
or otherwise. (n)
Rules to determine existence
of partnership.
Article 1769 lays down the rules for determining whether or
not an association is one of partnership. In general, to establish
the existence of a partnership, all of its essential features or
characteristics must be shown as being present.
(1) Where terms of contract not clear. — In the typical contract
of partnership, the parties expressly agree to unite their property
Art. 1769
GENERAL PROVISIONS
29
and services as co-proprietors to carry on a business for profit, and
to share the profits in stated proportions. Such a contract creates
no difficulty in regard to the determination of the existence of a
partnership relation. Sometimes, however, the contract between
the persons engaged in a business enterprise which is supposed
to create a partnership is uncertain in terms, or they have never
executed a formal expression of their relations. (59 Am. Jur. 2d
359.) In case of doubt, Article 1769 shall apply. It must be observed
that this article seeks to exclude from the category of partnership
certain features enumerated therein which, by themselves, are
not indicative of the existence of a partnership.
(2) Where existence disputed. — The existence of a partnership
may be disputed by an interested party. The issue as to whether
a partnership exists is a factual matter to be decided on the basis
of all circumstances. No single factor usually is controlling.
Where circumstances taken singly may be inadequate to prove
the intent to form a partnership, nevertheless the collective effect
of these circumstances may be such as to support a finding of the
existence of the parties’ intent. (Heirs of Tan Eng Kee vs. Court of
Appeals, 341 SCRA 740 [2000].)
Persons not partners as to each other.
Persons who are partners as between themselves are partners
as to third persons. Generally, the converse is true, to wit: if they
are not partners as between themselves, they cannot be partners
as to third persons.
(1) Intention to create partnership. — Partnership is a matter
of intention, each party giving his consent to become a partner.
Whether or not the parties call their relationship or believe their
relationship a partnership is immaterial. However, whether a
partnership exists between the parties is a factual matter. Where
the parties expressly declare they are not partners, this, as a rule,
settles the question as between themselves.16
16
It is, however, the substance, and not the name of the arrangement between them
which determines their legal relation toward each other. Thus, the intention to form a
partnership is not always required.
PARTNERSHIP
30
Art. 1769
(2) Partnership by estoppel. — A partnership can never exist as
to third persons if no contract of partnership, express or implied,
has been entered into between the parties themselves. (see Art.
1834, last par.) The exception refers to partnership by estoppel.
Thus, where persons by their acts, consent, or representations
have misled third persons or parties into believing that the former
are partners in a non-existing partnership, such persons become
subject to liabilities of partners to all who, in good faith, deal
with them in their apparent relations. This liability is predicated
on the doctrine of estoppel provided for in Article 1825.
EXAMPLE:
If A and B are not partners as to each other, neither will
they be partners with respect to C, a third person. But if A, with
the consent of B, represents to C that they are partners, then A
and B will be considered partners as to C even if they are not
really partners.
Co-ownership or co-possession.
There is co-ownership (or co-possession) whenever the ownership (or co-possession) of an undivided thing or right belongs to
different persons. (Art. 484.)
(1) Clear intent to derive profits from operation of business. — Coownership of property does not of itself establish the existence of
a partnership, although “co-ownership” is an essential element
of partnership. (see Art. 1811.)
(a) Two or more persons may become co-owners without
a contract (e.g., by inheritance or by law) but they cannot
be partners in the absence of contract. This is true even
though the co-owners share in the profits derived incident
to the joint ownership. The profits must be derived from the
operation of the business or undertaking by the members of
the association and not merely from property ownership. A
partner may transfer to the partnership, as his contribution,
merely the use or enjoyment of a specific thing, retaining the
ownership thereof. (Art. 1830[4].) In such case, the partners
become co-owners, not of the property, but of the right to use
such property.
Art. 1769
GENERAL PROVISIONS
31
(b) The law does not imply a partnership between coowners or co-possessors because of the fact that they develop
or operate a common property, since they may rightfully
do this by virtue of their respective titles. (Crondale vs. Van
Boynburgk, 195 Pa. 377, cited in Teller, p. 14.) Thus, in a case, it
was held that two isolated transactions whereby two persons
purchased two (2) parcels of land and then another three (3)
parcels of land and sold the same a few years thereafter, did
not thereby make them partners. There must be a clear intent
to form a partnership. (Pascual vs. Commission of Internal
Revenue, 166 SCRA 560 [1988].)
(2) Existence of fiduciary relationship. — If the parties are
partners in the business undertaking, there is a well-defined
fiduciary relationship between them as partners. On the other
hand, if the parties are merely co-owners, there is no fiduciary
relationship between them. If the parties are partners, the
remedy for a dispute or difference between them would be an
action for dissolution, termination, and accounting. Where the
relationship is that of co-owner, the remedy would be an action,
as for instance, for non-performance of a contract. (Barrett &
Seago, op. cit., p. 21.)
EXAMPLES:
(1) A and B inherited from their father an apartment
which is leased to third persons. Are they partners? No, they
are merely co-owners of the property, whether or not they
share in the profits made by the lease of the property, and not
of the lease business itself.
(2) A, B, and C, joint owners of merchandise, consigned
it for sale abroad to the same consignee. Each gave separate
instructions for his own share. In this case, the interests are
“several” and they are not to be treated as “partners” in the
adventure. (Berthold vs. Goldsmith, 65 U.S. 536; 31 Words and
Phrases 272.)
ILLUSTRATIVE CASES:
1. Heirs agreed, after partition, to use common properties and
income therefrom as a common fund with the intention of making
profit for them in proportion to their shares in the inheritance.
PARTNERSHIP
32
Art. 1769
Facts: A and B are co-owners of inherited properties. They
agreed to use the said common properties and the income
derived therefrom as a common fund with the intention to
produce profits for them in proportion to their respective
shares in the inheritance as determined in a project of partition.
Issue: What is the effect of such agreement on the existing
co-ownership?
Held: The co-ownership is automatically converted into a
partnership. From the moment of partition, A and B, as heirs,
are entitled already to their respective definite shares of the
estate and the income thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of
the other heirs, and, accordingly, he becomes liable individually
for all taxes in connection therewith.
If, after such partition, an heir allows his shares to be held
in common with his co-heirs under a single management to be
used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes,
at least, an unregistered17 partnership is formed. (Ona vs.
Commissioner of Internal Revenue, 45 SCRA 74 [1972].)
________
________
________
2. Two persons contributed money to buy a sweepstakes ticket
with the intention to divide the prize which they may win.
Facts: A, B, etc. put up money to buy a sweepstakes ticket
for the sole purpose of dividing equally the prize which they
may win as they did in fact the amount of P50,000.00. If a
partnership had been formed by A, B, etc. then it was liable for
income tax pursuant to law then in force; if merely a community
of property, then such co-ownership was not liable, not having
a legal personality of its own.
Issue: Did A, B, etc. form a partnership or merely a community of property?
Held: A, B, etc. formed a partnership. The partnership was
not only formed, but upon the organization thereof and the
17
A partnership, whether registered or not, other than a general professional partnership, is now considered for tax purposes a corporation and the partners are considered
stockholders. (see Sec. 26, The National Internal Revenue Code.) Before the amendment
of Section 26, only unregistered partnerships were taxable as corporations.
Art. 1769
GENERAL PROVISIONS
33
winning of the prize, it appeared that B personally appeared
in the office of the Philippine Charity Sweepstakes, in his
capacity as co-partner, and as such collected the prize. All
these circumstances repel the idea that A, B, etc. organized and
formed a community of property only. (Gatchalian vs. Collector
of Internal Revenue, 67 Phil. 666 [1939].)
________
________
________
3. Children sold lots given by their father and divided the
proceeds.
Facts: O, after completing payment to S on two lots,
transferred his rights to his four children, C, etc. to enable them
to build their residences. S sold the two lots for P178,708.12 to
C, etc. who resold them more than a year later to T for P313,050,
treating the profit of P134,341.88 as capital gains and paying an
income tax on one-half of their respective shares (or P33,584) of
the profit.
Issue: Did C, etc. form a partnership under Article 1767?
Held: No. (1) Division of profits was merely incidental. — They
were co-owners pure and simple. To consider them as partners
would obliterate the distinction between a co-ownership and a
partnership. C, etc. were not engaged in any joint venture by
reason of that isolated transaction.18
The original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to do so because
of the high cost of construction, then they had no choice but
to resell the same to dissolve the co-ownership. The division
of the profits was merely incidental to the dissolution of the
co-ownership which was, in the nature of things, a temporary
state. It has to be terminated sooner or later.
(3) There must be an unmistakable intention to form a partnership. — Article 1769(3) provides that “the sharing of gross
returns does not of itself establish a partnership whether or
not the persons sharing them have a joint or common right or
18
The Commissioner of Internal Revenue acted on the theory that C, etc., had formed
an unregistered partnership or joint venture within the meaning of Sections 24(a) and
76(b) of the National Internal Revenue Code. He required C, etc. to pay corporate income
tax on the total profit in addition to individual income tax on their shares thereof, considering the share of the profits of each (P33,584) as a distributive dividend taxable in full
(not a mere capital gain of which 1/2 is taxable).
34
PARTNERSHIP
Art. 1769
interest in any property from which the returns are derived.”
There must be an unmistakable intention to form a partnership
or joint venture.
Such intent was present in the Gatchalian case (supra.) where
15 persons contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would divide
the prize. The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered
partnership.
The instant case is distinguishable from the case where the
parties engaged in joint ventures of profit. Thus, in the Ona
case (supra.), where after an extrajudicial settlement the coheirs used the inheritance or the incomes derived therefrom as
a common fund to produce profits for themselves, it was held
that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of
Internal Revenue (24 SCRA 198 [1968]) where father and son
purchased a lot and building, entrusted the administration of
the building to an administrator, and divided equally the net
income, and from Evangelista vs. Collector of Internal Revenue
(102 Phil. 140 [1957]) where three sisters bought four pieces
of real property which they leased to various tenants and
derived rentals therefrom. Clearly, the petitioners in these two
cases had formed an unregistered partnership. (Obillos, Jr. vs.
Commissioner of Internal Revenue, 139 SCRA 436 [1985].)
(3) Persons living together without benefit of marriage. —
Before the new Civil Code went into operation on August 30,
1950, the Supreme Court had recognized marital partnerships
between persons living together without the bond of marriage
and made such union as basis of an informal civil partnership
which accords to each partner an equal interest in the properties
acquired by their joint efforts, but this is only so where there is
no impediment for a legal marriage between them. (Aznar vs.
Garcia, 102 Phil. 1055 [1958].)
This doctrine is no longer applicable under the Family Code
in view of the following provisions:
“Art. 147. When a man and a woman who are capacitated
to marry each other, live exclusively with each other as
husband and wife without the benefit of marriage or under
Art. 1769
GENERAL PROVISIONS
35
a void marriage, their wages and salaries shall be owned by
them in equal shares and the property acquired by both of
them through their work or industry shall be governed by
the rules on co-ownership x x x.”
Under Article 147, the property acquired by a man and a
woman who live together as husband and wife shall be governed
by the rules on co-ownership.19
Sharing of gross returns.
(1) Not even presumptive evidence of partnership. — The mere
sharing of gross returns alone does not indicate a partnership,
since in a partnership, the partners share net profits after
satisfying all of the partnership’s liabilities. (Arts. 1812, 1839;
see Evangelista vs. Collector of Internal Revenue, 102 Phil. 140
[1957].) As distinguished from the general rule recognizing
sharing of profits as presumptive evidence of partnership (infra.),
the sharing of gross returns has been held not to constitute even
prima facie evidence of the relation. (68 C.J.S. 441.)
(2) Reason for rule. — The reason behind the rule is a sound
and practical one, for when a business is carried on in behalf of
a given person as partner, he is conceived as being interested
in its failures as well as its successes; it is the chance of gain or
loss which characterizes a business, whether in the form of a
partnership or otherwise. As a matter of experience, therefore,
it is found generally that where the contract requires a given
portion of “gross returns” to be paid over, the portion is paid over
as commission, wages, rent, interest on a loan, etc. (Schleicker vs.
Krier, 218 Wis. 376.)
(3) Where there is evidence of mutual management. — Where,
however, there is further evidence of mutual management and
control, a partnership may result, even though the agreement
19
Article 147 (par. 1.) of the Family Code is taken from Article 144 of the new Civil
Code which has a similar provision. It reads:
“When a man and a woman live together as husband and wife, but they are not married, or their marriage is void from the beginning, the property acquired by either or both
of them through their work or industry or their wages and salaries shall be governed by
the rules on co-ownership. (n)”
PARTNERSHIP
36
Art. 1769
calls for a portion of “gross returns.” Of course, opinions will
differ with respect to the precise extent of management and
control necessary to create an inference of partnership, when
gross returns are involved. (Teller, op. cit., pp. 12-13.)
EXAMPLE:
A, owner of a passenger jeepney, agrees with B, a driver,
that B shall have full control and use of the jeepney to carry
passengers, pay for gasoline and oil, and shoulder the cost of
repairs, and that the gross receipts are to be divided between
them.
In this case, no partnership is established between A and B
as no sharing of profits is contemplated.
Receipt of share in the profits.
(1) Strong presumptive evidence of partnership. — An agreement to share both profits and losses tends strongly to establish
the existence of a partnership, and conversely, the lack of such
an agreement tends strongly to negate the existence of a partnership. But the mere fact of a right under the contract to participate
in both profits and losses of a business does not of itself have
the effect of establishing a partnership between those engaged
therein.
The sharing of profits and losses is prima facie evidence of an
intention to form a partnership but not a conclusive evidence.
The presumption of partnership arising from such profitsharing agreement may be rebutted and outweighed by other
circumstances. (see 59 Am. Jur. 2d 968-969.)
(2) When no such inference will be drawn. — While a right to
share of the profits, as such, is essential to constitute a person
a partner, this test may be controlled by other considerations.
Thus, under paragraph 4 of Article 1769, sharing of profits by
a person is not a prima facie evidence that he is a partner in the
business in the cases enumerated under sub-paragraphs (a), (b),
(c), (d), and (e). In all of the said cases, the profits in the business
are not shared as profits of a partner as a partner but in some
other respects or for some other purpose, i.e., to pay a debt to
Art. 1769
GENERAL PROVISIONS
37
creditor, wage to an employee, or rent to a landlord, annuity to a
widow or legal representative of a deceased partner, or interest
on a loan, or consideration for the sale of property, though the
amount of payment varies with the net profits of the business.
Where the “compensation’’ given to the manager of a project
who had put substantial sum in the venture is pegged to profits,
said compensation actually constitutes his share in the net profits
of the partnership as partner and not as employee. (Philex Mining
Corp. vs. Comm. of Internal Revenue, 551 SCRA 428 [2008].)
The basic test of partnership, whether inter se or as to third
persons, is whether the business is carried on in behalf of the
person sought to be held liable. And persons who are partners
in fact may not avoid the consequences of the relation by mere
word of denial.
(3) Sharing of profits as owner. — It is not merely the sharing
of profits, but the sharing of them as co-owner of the business or
undertaking, that makes one a partner. If the contract states that
the parties are partners or co-owners of the business, then they
are co-owners of the business. The courts must look beyond the
agreement if it is ambiguous or unclear.
A test given is this: “Does the recipient of a share of the profits
have an equal voice as proprietor in the conduct and control of
the business? Does he own a share of the profits as proprietor of
the business producing them?” Thus, if one takes a share of the
profits as payment of a debt, he is not a partner. (Babb & Martin,
Business Law [1957], p. 237.)
In other words, to be a partner, one must have an interest
with another in the profits of a business as profits.
EXAMPLES:
In the following cases, Y is not a partner in partnership X:
(1) Y, creditor of partnership X, is entrusted by the partners
to manage the business, and Y shall receive, in addition to
his compensation, a share in the net profits of the business in
settlement of his credit;
(2) Y, an employee of partnership X, shall receive instead
a fixed salary, or being the owner of a building rented by the
PARTNERSHIP
38
Art. 1769
partnership, Y shall receive as rent a certain percentage of the
monthly net profits of the business;
(3) Y, the widow of a deceased partner in partnership X,
in consideration of the continuation of the business without
liquidation and satisfaction of the deceased’s interest, shall
receive an annuity for a period of five (5) years based on a
certain percentage of the net profits;
(4) Y, creditor of partnership X, agreed that the payment of
interest shall be taken from the net profits to be realized by the
partnership; and
(5) Y sold property to partnership X, and he agreed that
the purchase price shall be paid out of the net profits of the
business.
In any of the above cases, Y shall not be entitled to receive
payment where there are no profits; nor shall he be liable to
share any losses incurred by the partnership.
ILLUSTRATIVE CASES:
1. The compensation of an employee was to be determined under
the contract with reference to the profits made by the partnership.
Facts: A brought action to recover the balance due him as
salary from B and C alleging that he was entitled to 5% of the
net profits of the business of B and C as co-partner of the latter.
Issue: Whether the contract made was one of partnership or
one of mere employment.
Held: The contract was a mere contract of employment.
A had no voice nor vote in the management of the affairs of
the company. The fact that the compensation received by him
was to be determined with reference to the profits made by B
and C in the business did not in any sense make him a partner
therein.
The articles of partnership between B and C provided that
the profits should be divided among the partners in a certain
proportion. The contract between A and the then manager
of the partnership did not in any way vary or modify this
provision of the articles of partnership.
The profits of the business could not be determined until
all the expenses had been paid, part of which was the salary
of A. It was undoubtedly necessary in order to determine
Art. 1769
GENERAL PROVISIONS
what the salary of A was, to determine what the profits of the
business were, after paying all of the expenses except his, but
that determination was not the final determination of the net
profits of the business which were to be divided between B and
C. It was made for the purpose of fixing the basis upon which
A’s compensation should be determined. (Fortis vs. Gutierrez
Hermanos, 6 Phil. 100 [1906]; see Sardane vs. Court of Appeals,
167 SCRA 524 [1988].)
________
________
________
2. The compensation of a supervisor was fixed in the contract
as 35% of the net profits of the business.
Facts: A entered into a contract with B Company whereby
A was to receive 35% of net profits of the fertilizer business of
B as compensation for his services of supervising the mixing of
fertilizers.
Issue: Whether the relationship established between A
and B was that of partners or merely that of employee and
employer.
Held: Neither the provisions of the contract nor the conduct
of the parties prior or subsequent to its execution justify the
conclusion that it was a contract of co-partnership.
In the case at bar, there was no common fund, that is, a
fund belonging to the parties as joint owners or partners. The
fact that the phrase “en sociedad con” was used in providing that
B shall not engage in the business of prepared fertilizers except
in association with A, does not show that the parties were
establishing a partnership or intended to become partners. The
phrase, as used in the contract, merely means “en sociedad con”
or in association with, and does not carry the meaning of in
partnership with. (Bastida vs. Menzi and Co., 58 Phil. [1933].)
________
________
________
3. Funds used in the purchase of a property by the partnership
were secured from third persons who were to share in the profits and
losses of the business.
Facts: Desiring to enlarge its business of operating the
steam launch Luisa, the partnership N & G composed of N and
G, purchased six (6) additional launches. It secured the sum of
P28,000.00 from X and four (4) others to finance said purchase.
A contract was executed for the purpose. Barely seven (7)
39
40
PARTNERSHIP
Art. 1769
months after its execution, the contract was terminated and the
launches were sold by mutual consent.
X brought action alleging that the contract was one of
partnership, and that the consent of his agent to the termination
of said contract and the sale of the launches was obtained by
fraud and the dissolution of the partnership was null and void.
Issue: Was the transaction a loan or a contract of partnership?
Held: (1) Features of loan contained in contract. — It was a loan
in view of the following features contained in the contract as
found by the Supreme Court:
(a) It is twice stated positively that N and G are
the only partners and the only persons interested in the
partnership of N and G, to which statements X assented to
when he signed the document;
(b) It is stated, also distinctly and positively, that the
money has been furnished as a loan;
(c) N and G bind themselves in the contract to repay
the amount something that they would not be bound to do
were the contract one of partnership;
(d) In the contract, N and G create in favor of X and
his associates a right of pledge over the launches, a thing
inconsistent with the idea of partnership;
(e) N and G are to be considered as consignees only as
long as they do not pay the debt. This indicates that they
had a right to pay it;
(f) They bind themselves not to alienate the launches
until they had paid the debt indicating clearly that by
paying the debt they could do so, a thing inconsistent with
the idea of a partnership; and
(g) It is also stated that the launch Luisa is not included
in the contract.
(2) Loans with right to receive profits in lieu of interests not
uncommon. — The fact that X was to share in the profits and
losses of the business and that N and G should answer for the
payment of the debt only with the launches and not with their
property, indicate that X was a partner. But these provisions are
not conclusive. The rights of third persons are not concerned.
The parties could, in making the contract, if they choose, take
some provisions from the law of partnership and others from
Art. 1769
GENERAL PROVISIONS
the law of loans. Loans with a right to receive a part of the
profits in lieu of interests are not uncommon. As between the
parties, such a contract is not one of a partnership. (Pastor vs.
Gaspar, 2 Phil. 592 [1903].)
________
________
________
4. The parties entered into an agreement to make a joint bid of
certain articles which the owner would only sell in one lot, with the
understanding that the property was to be owned in severalty, not
jointly, and that there was to be no sharing of profits or losses.
Facts: G & Co. was winding its business and had for sale
certain large trucks, and also small trucks or delivery wagons,
and certain electrical appliances to be used in connection with
the trucks. Plaintiff CL was desirous of purchasing only the
small trucks and the electrical appliances. Upon inquiry, CL
was told by G & Co. that all the articles would only be sold in
one lot, and he was advised to get in touch with HH who was
only interested in purchasing the large trucks.
Subsequently, CL and HH entered into an agreement to
make a joint bid.
The complaint alleges, among others:
“(4) That the defendant (HH) represented to the plaintiff
(CL) that he, said defendant, could purchase said trucks
and other property for the sum of $10,000, and plaintiff
thereupon agreed to advance toward such purchase price
the sum of $6,000, for which he was to receive six halfton trucks and six one-ton trucks, including full stock of
extra parts therefor, and also two charging boards, with
appurtenances. That the defendant should receive the
remainder of said trucks and property, excepting a certain
hydraulic lift, in return for the moneys advanced by said
defendant toward such purchase price. That the hydraulic
lift was to be disposed of between the parties by lot.
(5) That on or about April 11, 1918, the defendant
represented to the plaintiff that he could not purchase the
said trucks and other property for $10,000 but would be
obliged to pay $12,000 therefor, with the understanding
that, if G & Co. were unable to make delivery of the
charging boards and appurtenances, they would return
$1,000 of the purchase price.
41
42
PARTNERSHIP
Art. 1769
(6) That relying upon such representations, the plaintiff thereupon agreed to advance the sum of $7,000 towards
said purchase price, with the understanding that, if G &
Co. were unable to deliver the charging boards and appurtenances, the $1,000 to be rebated by said G & Co. for such
failure was to be divided pro rata between the plaintiff and
the defendant.
(7) That in pursuance of said agreement, the plaintiff
did on April 12, 1918, advance to the said defendant for the
purpose aforesaid the sum of $7,000.
(8) That thereafter, the said defendant did purchase
from said G & Co. the said trucks and other property,
excepting the charging boards and appurtenances thereto,
and did cause to be delivered to the plaintiff six half-ton
trucks and six one-ton trucks, with the extra parts, as
agreed, as aforesaid.
(9) That plaintiff is informed and believed to be true
that the defendant did not pay the sum of $12,000 to said
G & Co. for the said trucks and other property, including
said charging boards and appurtenances thereto, but in
fact the said defendant only paid the said G & Co. the sum
of $10,500 for said property, including the said charging
boards and appurtenances thereto.
(10) That defendant falsely represented to the plaintiff
that the purchase price of said property was $12,000, when
the purchase price in fact was only $10,500.
(11) That the said G & Co. was unable to make delivery
of said charging boards and appurtenances thereto, and that
in accordance with the agreement between the defendant
and the said G & Co., the said G & Co. did return to the
said defendant the sum of $1,000.’’
Issue: Does the agreement alleged in the complaint
constitute a partnership in a common-law action?
Held: (1) Essential elements of partnership lacking. — “According to the complaint, the property purchased was to be owned
in severalty, not jointly. There was to be no sharing of profits or
losses. If the trucks received by defendant were thereafter sold
by him for a greater price than the sum he contributed therefor,
the plaintiff had no interest in such profits and would have no
cause of action against defendant. If plaintiff sold his share of
Art. 1769
GENERAL PROVISIONS
43
the property purchased at a loss, he could not call on defendant
to contribute to such loss. Thus, the essential elements of partnership are lacking.’’
(2) Parties without interest in profits and losses. — “To constitute a partnership, as between the parties thereto, there must be
a joint ownership of the partnership funds, and an agreement,
either express or implied, to participate in the profits or losses
of the business. The complaint in this action distinctly negated
the idea of a joint interest in the profits or losses, as each of
the parties was to own the specifically described articles which
each needed and for which a specified sum was to be paid.
The hydraulic lift, which neither party appeared to want, was
not to be sold and the proceeds to be divided, but was “to be
disposed of between the parties by lot.’’ (Columbian Laundry vs.
Hencken, 196 N.V.S. 523 [1922].)
Burden of proof and presumption.
In accordance with the general rule of evidence, the burden of
proving the existence of a partnership rests on the party having
the affirmative of that issue.
(1) The existence of a partnership must be proved and will
not be presumed.
(2) The law presumes that persons who are acting as
partners have entered into a contract of partnership. Where the
law presumes the existence of a partnership (supra.), the burden
of proof is on the party denying its existence.
(3) When a partnership is shown to exist, the presumption is
that it continues in the absence of evidence to the contrary, and
the burden of proof is on the person asserting its termination. (68
C.J.S. 466.)
(4) One who alleges a partnership cannot prove it merely by
evidence of an agreement wherein the parties call themselves
partners, since use of the term “partner” in popular sense, or as
a matter of business convenience, will not necessarily import an
intention that a legal partnership should result. (31 Words and
Phrases 274.) But while use of “partnership” or “partners” in an
alleged oral agreement claimed to have constituted partnership
is not conclusive that partnership did not exist, non-use of such
terms is entitled to weight. (Ibid., 281.)
44
PARTNERSHIP
Art. 1769
(5) Among other meanings, “associate” means “partner,”
but a mere employee may also be an “associate.” “We” and “us,”
when used in an editorial sense, are not conclusive of either
partnership or employment. (Ibid., 274.)
(6) The question of whether or not a partnership exists
is not always dependent upon the personal arrangement or
understanding of the parties. Parties intending to do a thing
which in law constitutes partnership are partners, whether their
purpose was to create or avoid the relation (Ibid., 278.), or even
expressly stipulated in their agreement that they were not to
become partners.
We, therefore, arrive at the rule that legal intention is the
crux of partnership. Parties may call themselves partners in no
uncertain terms, yet their contract may be adjudged something
quite different. Conversely, parties may expressly stipulate that
their contract is not a partnership yet the law may determine
otherwise on the basis of legal intent. It is true, however, that
courts will be influenced to some extent by what the parties call
their contract. (Teller, op. cit., p. 9.)
Tests and incidents of partnership.
In determining whether a partnership exists, it is important to
distinguish between tests or indicia and incidents of partnership.
(1) Only those terms of a contract upon which the parties
have reached an actual understanding, either expressly or impliedly, may afford a test by which to ascertain the legal nature of
the contract. Once the legal nature of a contract as one of partnership has been established, whether or not the parties intended
that relationship to be called partnership or believed it to be a
partnership, certain consequences or incidents follow as a matter
of law, irrespective of any actual understanding between the parties. (see 40 Am. Jur. 146-147.)
(2) Some of the typical incidents of a partnership are:
(a) The partners share in profits and losses. (Arts. 1767,
1797, 1798.) This community of interest in profits is not
incidental to the ordinary agency;
Art. 1769
GENERAL PROVISIONS
45
(b) They have equal rights in the management and
conduct of the partnership business (Art. 1803.);
(c) Every partner is an agent of the partnership, and
entitled to bind the other partners by his acts, for the purpose
of its business. (Art. 1818.) He may also be liable for the entire
partnership obligations;
(d) All partners are personally liable for the debts of the
partnership with their separate property (Arts. 1816, 18221824.) except that limited partners are not bound beyond the
amount of their investment (Art. 1843.);
(e) A fiduciary relation exists between the partners (Art.
1807.); and
(f) On dissolution, the partnership is not terminated, but
continues until the winding up of partnership is completed.
(Art. 1828.)
Such incidents may be modified by stipulation of the partners
subject to the rights of third persons dealing with the partnership.
Partnership distinguished from
a labor union.
A labor union is any association of employees which exists
in whole or in part for the purpose of collective bargaining or
of dealing with employers concerning terms and conditions of
employment. (Art. 210, Labor Code.)
Partnerships and labor unions have some characteristics in
common, but the purpose of partnership is essentially to enable
its members, as principals, to conduct a lawful business, trade,
or profession for pecuniary gain of partners, and no one may
become a partner without consent of all partners. (People vs.
Herbert, 295 N.Y.S. 251, 162 Misc. 817; 68 C.J.S. 403.)
Partnership distinguished from
a business trust.
A trust is the legal relationship between one person (beneficiary) having the equitable ownership in property and another
(trustee) owning the legal title to such property, the equitable
46
PARTNERSHIP
Art. 1769
ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. (76
Am. Jur. 2d, 247-248; see Art. 1440.)
An outstanding distinction between the partnership and
trust relations is that in the partnership, all of the members are
principals and are agents for each other (see Art. 1818.), while
the trustee is only a principal and is not an agent. (68 C.J.S. 403.)
Only the trustee and not the beneficiaries is empowered to make
contracts to carry on the business affairs and the only one who
has legal title to the property.20 (Teller, op. cit., p. 25.)
In a partnership, a partner is a “co-owner” with his partners
of specific partnership property. (Art. 1811.)
Partnership distinguished from
co-ownership.
There is a co-ownership whenever the ownership of an
undivided thing or right belongs to different persons. (Art. 484.)
It is the right of common dominion which two or more persons
have in a spiritual part of a thing which is not physically divided.
(4 Sanchez Roman 162.)
The following are the distinctions between a partnership and
a co-ownership:
(1) Creation. — Co-ownership is generally created by law.
It may exist even without a contract, but partnership is always
created by a contract (Art. 1767.), either express or implied;
(2) Juridical personality. — A partnership has a juridical
personality separate and distinct from that of each partner (Art.
1768.), while a co-ownership has none;
(3) Purpose. — The purpose of a partnership is the realization
of profits (Art. 1767.), while in co-ownership, it is the common
20
A business trust, also called a “Massachusetts trust,” has been defined by the U.S.
Supreme Court as a form of business organization “consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to
time be the holders of transferable certificates issued by the trustees showing the shares
into which the beneficial interest in the trust property is divided.” (Hecht vs. Malley, 265
U.S. 144.)
Art. 1769
GENERAL PROVISIONS
47
enjoyment of a thing or right (see Art. 486.) which does not
necessarily involve the sharing of profits;
(4) Duration. — Under the law, there is no limitation upon
the duration of a partnership (see Arts. 1767, 1785.) while in coownership, an agreement to keep the thing undivided for more
than ten years is not allowed (see Art. 494.);
(5) Disposal of interests. — A partner may not dispose of his
individual interest in the partnership (Art. 1812.) so as to make
the assignee a partner unless agreed upon by all of the partners
(see comments under Art. 1814.), while a co-owner may freely do
so (see Art. 495.);
(6) Power to act with third persons. — In the absence of any
stipulation to the contrary (Art. 1803.), a partner may bind the
partnership, while a co-owner cannot represent the co-ownership
(see Arts. 491, 492.); hence, a judgment secured against only one
of the co-owners will not bind the other co-owners (Smith vs.
Lopez, 5 Phil. 78 [1905].); and
(7) Effect of death. — The death of a partner results in the
dissolution of the partnership (Art. 1830[5].), but the death of
a co-owner does not necessarily dissolve the co-ownership.
(Rodriguez vs. Ravalan, 17 Phil. 63 [1910].)
ILLUSTRATIVE CASES:
1. Land purchased with funds contributed by the parties would
be divided equally between them.
Facts: Under a verbal contract, A and B contributed P22.00
each for the purpose of purchasing a parcel of land. It was
agreed that upon its acquisition, the property would be divided
equally between them. A kept the land for himself and refused
to divide. B brought an action for partition.
Issue: Did the parties enter into a contract of partnership?
Held: No. The transaction entered into between A and B
was the acquisition jointly by mutual agreement of the land in
question, not for the purpose of undertaking any business, nor
for its cultivation in partnership, but solely to divide it equally
between them. Since the land was undivided, A and B were coowners of the said land, and the partition or division of such
PARTNERSHIP
48
Art. 1769
property must, therefore, be allowed in accordance with their
agreement. (Gallemet vs. Tabilaran, 20 Phil. 241 [1911].)
________
________
________
2. Cascoes were acquired for a transportation business with the
intention to share in the profits but the parties were unable to draw
up the written articles of partnership because of disagreement as to its
terms.
Facts: A and B entered into a verbal contract for the purchase of cascoes and the subsequent establishment of a transportation business, each to furnish for the purpose such money
as he could, the profits to be divided proportionately between
them. A was to buy the cascoes. He bought two out of the money contributed by both of them.
The parties were unable to draw up the articles of partnership because of disagreement as to its terms.
Issue: Did the parties enter into a contract of partnership?
Held: Yes. The minds of the parties met upon two essential
points, to wit: (a) mutual contribution to a common fund and
(b) a joint interest in the profits. The first was established by the
fact that money was furnished by B and received by A for the
purchase of the cascoes. The intention to share in the profits, the
second element, could not but be deduced from the purchase of
the cascoes in common in the absence of any other explanation
of the object of the parties in making the purchase in that form.
“If, for instance, it were shown that the object of the parties
in purchasing it in company had been to make a more favorable bargain for the two cascoes, then they could have done
by purchasing them separately, and that they had no ulterior
object except to effect a division of the common property when
once they had acquired it, the affectio societatis would be lacking, and the parties would become joint tenants only; but, as
nothing of this sort appears in the case, we must assume that
the object of the purchase was active use and profit and not
mere passive ownership in common.” (Fernandez vs. De la Rosa,
1 Phil. 671 [1902].)
Partnership distinguished from conjugal
partnership of gains.
Conjugal partnership of gains is a partnership formed by the
marriage of husband and wife by virtue of which they place in a
Art. 1769
GENERAL PROVISIONS
49
common fund the fruits and income of their separate properties
and those acquired through their efforts or by chance, and unless
otherwise agreed upon in the marriage settlements, divide
equally, upon the dissolution of the marriage or the partnership,
the net gains or benefits obtained by either or both of them during
the marriage. (Art. 106, Family Code.)
The ordinary or business partnership may be distinguished
from a conjugal partnership as follows:
(1) Parties. — A business partnership is created by the voluntary agreement of two or more partners (Art. 1767.) belonging to
either sex, while a conjugal partnership arises in case the future
spouses — a man and a woman — agree that it shall govern their
property relations during the marriage (Art. 105, Family Code.);
(2) Laws which govern. — The ordinary partnerships are, as
a rule, governed by the stipulation of the parties (see Arts. 1159,
1308.), whereas a conjugal partnership is governed by law (Arts.
105-133, Ibid.);
(3) Juridical personality. — A partnership has a juridical
personality (Art. 1768.), while a conjugal partnership of gains has
none;
(4) Commencement. — A partnership begins from the moment
of the execution of the contract, unless it is otherwise stipulated
(Art. 1784.), while a conjugal partnership of gains commences
precisely on the date of the celebration of the marriage and any
stipulation to the contrary is void (Arts. 88, 107, Ibid.);
(5) Purpose. — The primary purpose of the ordinary
partnership is to obtain profits (Art. 1767.), while that of a conjugal
partnership is to regulate the property relations of husband and
wife during the marriage (Art. 74, Ibid.);
(6) Distribution of profits. — In the ordinary partnership, the
profits are divided according to the agreement of the partners
or in proportion to their respective capital contributions (Art.
1797.), while in a conjugal partnership, the shares of the spouses
in the profits are divided equally (Art. 106, Ibid.);
(7) Management. — In the ordinary partnership, the management is shared equally by all the partners unless one or more
50
PARTNERSHIP
Art. 1769
of them are appointed managers in the articles of partnership
(Arts. 1801-1803.), while in a conjugal partnership, although the
administration belongs to both spouses jointly, the husband’s decision shall prevail in case of disagreement (Art. 124, Ibid.); and
(8) Disposition of shares. — In the ordinary partnership, the
whole interest of a partner may be disposed of without the
consent of the other partners (see comments under Art. 1813.),
while in a conjugal partnership, the share of each spouse cannot
be disposed of during the marriage even with the consent of the
other. (see Arts. 89, 107, 121, 127, Ibid.)
Partnership distinguished from
a voluntary association.
A partnership is distinguished from voluntary associations
organized for social purposes (such as social clubs, committees,
lodges, fraternal societies, etc.) as follows:
(1) Juridical personality. — A partnership has a juridical
personality, while a voluntary association has none;
(2) Purpose. — A partnership is always organized for pecuniary profit, while in a voluntary association, this objective is lacking;
(3) Contributions of members. — In a partnership, there is a
contribution of capital, either in the form of money, property, or
services, while in a voluntary association for social purposes,
although fees are usually collected from the members to maintain
the organization, there is no contribution of capital; and
(4) Liability of members. — The partnership, as a rule, is the
one liable in the first place for the debts of the firm, while in a
voluntary association, the members are individually liable for
the debts of the association, authorized by them either expressly
or impliedly, or subsequently ratified by them. (Mechem, op. cit.,
p. 115.)
The members of such associations, societies, or clubs are not
strictly partners, though the organization may possess business
features and be conducted partly for pecuniary gain. The
property rights and the legal liabilities of the members depend,
Art. 1769
GENERAL PROVISIONS
51
as between themselves, on the constitution and rules of the
association or club. (40 Am. Jur. 130.) If in a particular case such
members are held personally liable for the acts or obligations of
the association, their liability is based on the law of agency, and
such agency must be clearly shown.
ILLUSTRATIVE CASE:
Pursuant to “reinsurance treaties,’’ a number of local insurance
firms formed themselves into a “pool’’ in order to facilitate the
handling of business contracted with a non-resident foreign insurance
company.
Facts: The petitioners are 41 non-life insurance corporations,
organized and existing under the laws of the Philippines.
Upon issuance by them of Erection, Machinery Breakdown,
Boiler Explosion and Contractors’ All Risk insurance policies,
the petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with
the MUNICH, a non-resident foreign insurance corporation.
The reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed on
the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of
Organization Exempt from Income Tax” for the year ending in
1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the
amount of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich
and to the petitioners, respectively.
On January 27, 1986, the Commissioner of Internal Revenue
denied the protest and ordered the petitioners, assessed as
“Pool of Machinery Insurers,” to pay deficiency income tax,
interest, and withholding tax.
The Court of Appeals ruled in the main that the pool of
machinery insurers was a partnership taxable as a corporation,
and that the latter’s collection of premiums on behalf of its
members, the ceding companies, was taxable income.
Petitioners belie the existence of a partnership in this
case, because: (1) they, the insurers, did not share the same
risk or solidary liability; (2) there was no common fund; (3)
52
PARTNERSHIP
Art. 1769
the executive board of the pool did not exercise control and
management of its funds, unlike the board of directors of a
corporation; and (4) the pool or clearing house “was not and
could not possibly have engaged in the business of reinsurance
from which it could have derived income for itself.’’
Issue: One of the three (3) issues raised by the petitioners is
whether or not the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not
insure or assume any risk in its own name, was a partnership
or association subject to tax as a corporation.
Held: (1) Business partnerships taxable as corporation. —
“Under Sections 20 and 24 (now Secs. 22 and 27) of the National
Internal Revenue Code (NIRC), (business) partnerships are
included in the term “corporation’’ and taxable as such.
Thus, in Evangelista vs. Collector of Internal Revenue (102
Phil. 140 [1957]), it was held that Section 24 covered these
unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from their
individual members.’’
(2) Formation of a partnership. — Article 1767 of the Civil
Code recognizes the creation of a contract of partnership when
‘two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention
of dividing the profits among themselves.’ Its requisites are:
‘(1) mutual contribution to a common stock, and (2) a joint
interest in the profits.’ In other words, a partnership is formed
when persons contract ‘to devote to a common purpose either
money, property, or labor with the intention of dividing
the profits between themselves.’ Meanwhile, an association
implies associates who enter into a ‘joint enterprise x x x for the
transaction of business.’ ’’
(3) Pool of machinery insurers formed a partnership. — “In
the case before us, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurance
business covered under their quota-share reinsurance treaty
and surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered
by Section 24 of the NIRC.
(a) The pool has a common fund, consisting of
money and other valuables that are deposited in the name
Art. 1769
GENERAL PROVISIONS
53
and credit of the pool. This common fund pays for the
administration and operation expenses of the pool.
(b) The pool functions through an executive board,
which resembles the board of directors of a corporation,
composed of one representative for each of the ceding
companies.
(c) True, the pool itself is not a reinsurer and does
not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because
without it they would not have received their premiums.
The ceding companies share ‘in the business ceded to
the pool’ and in the ‘expenses’ according to a ‘Rules of
Distribution’ annexed to the Pool Agreement. Profit motive
or business is, therefore, the primordial reason for the
pool’s formation.’’
(d) Insurers become partners not mere co-owners. — “The
petitioner’s reliance on Pascual vs. Commissioner (166 SCRA
560 [1988].) is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual,
there was no unregistered partnership, but merely a coownership which took up only two isolated transactions.
The Court of Appeals did not err in applying Evangelista,
which involved a partnership that engaged in a series of
transactions spanning more than ten years, as in the case
at bar.’’ (AFISCO Insurance Corporation vs. Court of Appeals,
302 SCRA 1 [1999].)
Partnership distinguished from
a corporation.
The following are the distinctions:
(1) Manner of creation. — A partnership is created by mere
agreement of the parties (Art. 1787.), while a corporation is
created by law or by operation of law (Sec. 2, B.P. Blg. 68.);
(2) Number of incorporators. — A partnership may be
organized by only two persons (Art. 1767.), while a corporation
(except a corporation sole) requires at least five incorporators
(Sec. 10, Ibid.);
(3) Commencement of juridical personality. — A partnership
commences to acquire juridical personality from the moment of
54
PARTNERSHIP
Art. 1769
the execution of the contract of partnership (Art. 1784.), while
a corporation begins to have juridical personality only from
the date of issuance of the certificate of incorporation by the
Securities and Exchange Commission (Sec. 19, Ibid.);
(4) Powers. — A partnership may exercise any power
authorized by the partners provided it is not contrary to law,
morals, good customs, public order, or public policy (Art. 1306.),
while a corporation can exercise only the powers expressly
granted by law or implied from those granted or incident to its
existence (Secs. 2, 36, Ibid.);
(5) Management. — In a partnership, when the management
is not agreed upon, every partner is an agent of the partnership
(Art. 1803.), while in a corporation, the power to do business and
manage its affairs is vested in the board of directors or trustees
(Sec. 23, Ibid.);
(6) Effect of mismanagement. — In a partnership, a partner as
such can sue a co-partner who mismanages (see Arts. 1794, 1806,
1809.), while in a corporation, the suit against a member of the
board of directors or trustees who mismanages must be in the
name of the corporation (see Sec. 23, Ibid.);
(7) Right of succession. — A partnership has no right of
succession (see Arts. 1828-1831, 1860.), while a corporation has
such right (Sec. 2, Ibid.);
(8) Extent of liability to third persons. — In a partnership,
the partners (except limited partners) are liable personally and
subsidiarily (sometimes solidarily) for partnership debts to third
persons (see Arts. 1816, 1822-1824.), while in a corporation, the
stockholders are liable only to the extent of the shares subscribed
by them (see Secs. 64, 37, Ibid.);
(9) Transferability of interest. — In a partnership, a partner
cannot transfer his interest in the partnership so as to make the
transferee a partner without the consent of all the other existing
partners because the partnership is based on the principle of
delectus personarum (see Arts. 1767, 1804.), while in a corporation,
a stockholder has generally the right to transfer his shares without
Art. 1769
GENERAL PROVISIONS
55
the prior consent of the other stockholders because a corporation
is not based on this principle (Sec. 63, Ibid.);
(10) Term of existence. — A partnership may be established
for any period of time stipulated by the partners (see Arts. 1767,
1785.), while a corporation may not be formed for a term in
excess of 50 years extendible to not more than 50 years in any
one instance (Sec. 11, Ibid.);
(11) Firm name. — A limited partnership is required by the
law to add the word “Ltd.” to its name (Art. 1844[1, a].), while
a corporation may adopt any firm name provided it is not the
same as or similar to any registered firm name (see Sec. 18, Ibid.);
(12) Dissolution. — A partnership may be dissolved at any
time by the will of any or all of the partners (Art. 1830[1, 2].),
while a corporation can only be dissolved with the consent of the
State (Secs. 117-122, Ibid.); and
(13) Governing law. — A partnership is governed by the Civil
Code, while a corporation is governed by the Corporation Code.
Similarities between a partnership
and a corporation.
They are as follows:
(1) Like a corporation, a partnership has a juridical personality separate and distinct from that of the individuals composing
it;
(2) Like a corporation, a partnership can act only through
agents;
(3) Like a corporation, a partnership (except a corporation
sole) is an organization composed of an aggregate of individuals;
(4) Like a (stock) corporation, a partnership distributes its
profits to those who contribute capital to the business (although
an industrial partner also shares in partnership profits);
(5) Like a corporation, a partnership can be organized only
where there is a law authorizing its organization; and
(6) A partnership, no matter how created or organized (except
56
PARTNERSHIP
Art. 1770
a general professional partnership)21 is taxable as a corporation,
subject to income tax. (Secs. 20[b], 24[a], NIRC.)
ART. 1770. A partnership must have a lawful object
or purpose, and must be established for the common
benefit or interest of the partners.
When an unlawful partnership is dissolved by
a judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the provisions
of the Penal Code governing the confiscation of the
instruments and effects of a crime. (1666a)
Object or purpose of partnership.
The provision of the first paragraph of the above article
reiterates two essential elements of a contract of partnership:
legality of the object and community of benefit or interest of the
partners. (see Art. 1767.)
The parties possess absolute freedom to choose the transaction
or transactions they must engage in. The only limitation is
that the object must be lawful and for the common benefit of
the members. This limitation arises not only from the express
provisions of the law, but from the general principles of morality
and justice. (Espiritu and Sibal, op. cit., p. 5; see Art. 1306.)
The illegality of the object will not be presumed; it must
appear to be of the essence of the relationship. (Barrett & Seago,
op. cit., p. 291.) Pursuant to applicable laws, certain businesses
(e.g., banking) may be engaged in only by corporations.
21
General professional partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession no part of the income of which is derived
from engaging in any trade or business. (Sec. 20[b], NIRC.) Under the Civil Code, they
are classified as particular partnerships. (see Art. 1783.) Under the Tax Code, partnerships
are either taxable or exempt. Exempt partnerships (such as general professional partnerships and joint ventures for undertaking construction projects or engaging in petroleum
operations (see Sec. 20[b], NIRC.), are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. Hence, the partners
themselves, not the partnership (although it is still obligated to file an income tax return
mainly for administration and data), are liable for the payment of income tax in their
individual capacity computed on their respective distributive shares of profits. (Tan vs.
Del Rosario, Jr., 237 SCRA 324 [1994].)
Art. 1770
GENERAL PROVISIONS
57
Effects of an unlawful partnership.
The following are the consequences of a partnership formed
for an unlawful purpose:
(1) The contract is void ab initio and the partnership never
existed in the eyes of the law (Art. 1409[1].);
(2) The profits shall be confiscated in favor of the government;
(3) The instruments or tools and proceeds of the crime shall
also be forfeited in favor of the government;22 and
(4) The contributions of the partners shall not be confiscated
unless they fall under No. 3.23
A partnership is dissolved by operation of law upon the
happening of an event which makes it unlawful for the business
of the partnership to be carried on, or for the members to carry it
on in partnership. (Art. 1830[3].)
A judicial decree is not necessary to dissolve an unlawful
partnership. However, it may sometimes be advisable that a
judicial decree of dissolution be secured for the convenience
22
Art. 45. Confiscation and forfeiture of the proceeds or instruments of the crime. — Every
penalty imposed for the commission of a felony shall carry with it the forfeiture of the
proceeds of the crime and the instruments or tools with which it was committed.
Such proceeds and instruments or tools shall be confiscated and forfeited in favor of
the Government, unless they be the property of a third person not liable for the offense,
but those articles which are not subject of lawful commerce shall be destroyed. (Revised
Penal Code)
23
Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise.
(1305)
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the other’s
undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given without
any obligation to comply with his promise. (1306)
PARTNERSHIP
58
Art. 1770
and peace of mind of the parties. Third persons who deal with
the partnership without being aware of its illegal purpose or
character are protected unless such knowledge can be presumed
as where the transaction is plainly unlawful.
ILLUSTRATIVE CASE:
A party to a contract of partnership providing for the division of
a fishpond between the parties which stipulation is illegal, seeks the
transfer of 1/2 of the fishpond.
Facts: A filed a fishpond application for a big tract of swampy
land. B also filed his own application for the area covered by
A’s application. A introduced improvements on portions of
the area applied for him in the form of dikes, fishpond gates,
clearings, etc. Subsequently, A and C (B’s wife) entered into
a contract of partnership, with A as industrial partner and C,
as capitalist partner, which contract may be divided into two
parts, namely, a contract to exploit the fishpond pending its
award to either A or B, and a contract to divide the fishpond
between A and C after such award.
The Secretary of [Agriculture and] Natural Resources
awarded to A the possession of the area in question. Thereafter,
A forbade C from further administering the fishpond.
B and C brought action for specific performance and
damages resulting from breach of contract. Under the law (Sec.
63, Act No. 4003 [Fisheries Act] and Fisheries Administrative
Order 14, Sec. 7.), the transfer or subletting of fishponds covered
by permits or lease agreements without prior approval of the
DENR Secretary is prohibited.
Issue: Is the contract of partnership valid?
Held: (1) The first part is valid. — Although the fishpond
was then in possession of A, neither he nor B was the holder
of a fishpond permit over the area. Be that as it may, they were
not, however, precluded from exploiting the fishpond pending
approval of A’s application over the same area. No law, rule, or
regulation prohibited them from doing so. Thus, rather than let
the fishpond remain idle, they cultivated it.
(2) The second part is illegal. — Under the law, only a holder
of a permit or lease and no one else may enjoy the benefits
allowed by the law. Since the partnership had for its object
Art. 1770
GENERAL PROVISIONS
59
the division into two equal parts of the fishpond between
A and C after it shall have been awarded to the former, and
therefore, it envisaged the unauthorized transfer of one-half
thereof to C other than A, it was dissolved by the approval of
the application and the award of the fishpond. The approval
was an event which made it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership and, therefore, caused its ipso facto dissolution. (see
Art. 1830[3].) (Deluao vs. Casteel, 26 SCRA 475 [1968].)
And since the contract is null and void, A cannot be made
to execute a formal transfer of one-half of the fishpond and to
secure official approval of the same as agreed upon. (Ibid., 29
SCRA 350 [1969].)
Right to return of contribution where
partnership is unlawful.
(1) Article 1770 does not state whether upon the dissolution
of the unlawful partnership, the amounts contributed are to
be returned to the partners, because it only deals with the
disposition of profits. The fact, however, that said contributions
are not included in the disposal prescribed for said profits, shows
that in consequence of said exclusion, the general rules of law
must be followed, and hence, the partners must be reimbursed
the amount of their respective contributions.
(2) The partner who limits himself to demanding only the
amount contributed by him need not resort to the partnership
contract on which to base his claim or action. Since the purpose
for which the contribution was made has not come into existence,
the manager or administrator of the partnership holding
said contribution retains what belongs to others, without any
consideration, for which reason he is bound to return it, and he
who has paid in his share is entitled to recover it.
(3) Any other solution would be immoral, and the law will
not consent to the contribution remaining in the possession of
the manager or administrator who has refused to return them by
denying to the partners the action to demand them. (Arbes vs.
Polistico, 53 Phil. 489 [1929].)
60
PARTNERSHIP
Art. 1770
Right to receive profits where
partnership is unlawful.
(1) Article 1770 permits no action for the purpose of obtaining the earnings made by an unlawful partnership, during its
existence as a result of the business in which it was engaged,
because for that purpose, the partner will have to base his action
upon the partnership contract, which is null and without legal
existence by reason of its unlawful object; and it is self-evident
that what does not exist cannot be a cause of action.
(2) The profits earned in the course of the partnership do not
constitute or represent the partner’s contribution but are the result
of the industry, business, or speculation which is the object of the
partnership; and again, in order to demand the proportional part
of said profits, the partner would have to base his action on the
contract, which is null and void since the partition or distribution
of profits is one of the juridical effects thereof.
(3) Furthermore, it would be immoral and unjust for the law
to permit a profit from an industry prohibited by it. (Ibid.)
(4) Under the general rule that the courts will not aid either
party to an illegal agreement (see Art. 1411.), where a partnership
is formed for the prosecution of an illegal business or for the
conduct of a lawful business in an illegal manner, the courts will
refuse to recognize its existence, and will not lend their aid to
assist either of the parties thereto in an action against each other.
Therefore, there can be no accounting demanded of a partner for
the profits which may be in his hands, nor can a recovery be had.
(68 C.J.S. 411.)
Effect of partial illegality of partnership
business.
(1) Where a part of the business of a partnership is legal and
a part illegal, an account of that which is legal may be had.
(2) Where, without the knowledge or participation of the
partners, the firm’s profits in a lawful business have been increased by wrongful acts, the innocent partners are not precluded as against the guilty partners from recovering their share of
the profits. (Ibid.)
Art. 1770
GENERAL PROVISIONS
61
Effect of subsequent illegality of partnership
business.
Under Article 1830, one of the causes for the dissolution of
a partnership is “any event which makes it unlawful for the
business of the partnership to be carried on or for the members
to carry it on in partnership.”(Art. 1830[3].)
The happening of an event subsequent to the making of a valid
partnership contract which would render illegal the business of
the partnership as planned, will not nullify the contract. Where
the business for which the partnership is formed is legal when
the partnership is entered into, but afterward becomes illegal,
an accounting may be had as to the business transacted prior to
such time. (68 C.J.S. 412.)
Community of interest between the partners
for business purposes.
The salient features of an ordinary partnership are a community of interest in profits and losses, a community of interest in
the capital employed, and a community of power in administration.24 (Crane, op. cit., p. 61.)
(1) This community of interest — the partners must be coowners of the business — is the basis of the partnership relation.
However, although every partnership appears to be founded
on a community of interest, every community of interest does
24
These features are comprehended in one of the essential requisites of partnership
which is simply known in American law as “community of interest.” Our Civil Code
adheres to this notion of community of interest when it speaks of the contribution of
the partners “to a common fund, with the intention of dividing the profits among themselves” (Art. 1767.) and requires that a partnership must be “established for the common
benefit and interest of the partners.” The term “common fund” connotes co-ownership
by the partners of the property and business of the partnership and which in turn implies
joint powers of management and control of the partnership and sharing of the profits
and losses.
The partners may, however, by agreement, entrust the management of the business
to one or some of them. (see Arts. 1801-1803.) Such an arrangement is itself an exercise of
the right to participate in the management or control of the partnership. (Art. 1810[3].) In
a limited partnership, the limited partners do not participate in the control or management of the business. (see Art. 1848.)
62
PARTNERSHIP
Art. 1771
not necessarily constitute a partnership. For example, tenants in
common of land are not partners. (59 Am. Jur. 2d 964.)
(2) Property used in the business may belong to one or
more partners, so that there is no joint property, other than joint
earnings. To state that partners are co-owners of a business is to
state that they have the power of ultimate control. But partners
may agree upon concentration of management, leaving some of
their members entirely inactive or dormant.
(3) Only one of these features, profit-sharing, seems to be
absolutely essential. No doubt, in every partnership, profits are
to be divided among the partners. (see Crane, op. cit., pp. 6163.) But the mere sharing of profits of itself does not of necessity
constitute a partnership or the members partners inter se. (68
C.J.S. 427; see Art. 1769[4].)
Pursuant to Article 1767, the court must consider all the
essential elements of a partnership in the light of the facts of
the particular case before deciding whether or not a partnership
exists.
ART. 1771. A partnership may be constituted in any
form, except where immovable property or real rights
are contributed thereto, in which case a public instrument shall be necessary. (1667a)
Form of partnership contract.
(1) General rule. — As a general rule, no special form is
required for the validity or existence of the contract of partnership.
(see Art. 1356.) The contract may be made orally or in writing
regardless of the value of the contributions.
(2) Where immovable property or real rights are contributed. —
In such case, according to Article 1771, “a public instrument
shall be necessary,” without stating, unlike Article 1773, that
without the public instrument, the contract is void. (see Arts.
1356-1358.) Read together, they require the execution of a public
instrument for the validity of a contract of partnership whenever
immovable property is contributed thereto. To affect third
persons, the transfer of real property to the partnership must be
Art. 1771
GENERAL PROVISIONS
63
duly registered in the Registry of Property of the province or city
where the property contributed is located.
(3) When partnership agreement covered by Statute of Frauds. —
An agreement to enter in a partnership at a future time, which “by
its terms is not to be performed within a year from the making
thereof” is covered by the Statute of Frauds. Such agreement is
unenforceable unless the same be in writing or at least evidenced
by some note or memorandum thereof subscribed by the parties.
(see Art. 1403[2, a].)
Partnership implied from conduct.
(1) Binding effect. — A partnership may exist and often exists
in the absence of express agreement, written or verbal, between
the parties. Its existence may be implied from the acts or conduct
of the parties, as well as from other declarations, and such
implied contract would be as binding as a written and express
contract. Thus, where A and B, house painters, oblige themselves
to paint the house of C for a certain sum, undertaking to furnish
both labor and material, and they divide the sum received after
payment of expenses, a partnership is created notwithstanding
that they did not expressly agree to establish a partnership.
(2) Ascertainment of intention of parties. — In determining
whether or not a particular transaction constitutes a partnership,
as between the parties, the intention as disclosed by the entire
transaction, and as gathered from the facts and from the language
employed by the parties as well as their conduct, should be
ascertained. A partnership may even be created without any
definite intention; the intention of the parties being inferred from
their conduct and dealings with each other. (see Kiel vs. Estate
of Sabert, 46 Phil. 198 [1924]; Negado vs. Makabento, [CA] No.
10342-R, Feb. 28, 1948.)
(3) Conflict between intention and terms of contract. — Also, if
the parties intend a general partnership, they are general partners
although their purpose is to avoid the creation of such a relation.
Thus, in a case, the Supreme Court declared an association as
a general partnership it appearing that the inclusion of “Ltd.”
PARTNERSHIP
64
Art. 1772
(limited) in the firm name was only a subterfuge resorted to by
the partners in order to evade liability for possible losses, while
assuming their enjoyment of the advantages to be derived from
the relation. (Jo Chung Cang vs. Pacific Commercial Co., 45 Phil.
142 [1923].)
ART. 1772. Every contract of partnership having a
capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which
must be recorded in the Office of the Securities and
Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.
(n)
Registration of partnership.
(1) Partnership with capital of P3,000.00 or more. — There
are two requirements where the capital of the partnership is
P3,000.00 or more,25 in money or property, namely:
(a) The contract must appear in a public instrument; and
(b) It must be recorded or registered with the Securities
and Exchange Commission.
However, failure to comply with the above requirements
does not prevent the formation of the partnership (Art. 1768.)
or affect its liability and that of the partners to third persons.
But any of the partners is granted the right by the law (see Arts.
1357, 1358.) to compel each other to execute the contract in a
public instrument. Of course, this right cannot be availed of if
the partnership is void under Article 1773.
From the strictly legal point of view, therefore, a partnership with a capital of less
than P3,000.00 need not register its articles of partnership. However, for purposes of convenience in dealing with government offices and financial institutions, registration of
partnership having a capital of less than P3,000.00 is recommended. (SEC Opinion, June
1, 1960.)
25
Art. 1773
GENERAL PROVISIONS
65
(2) Purpose of registration. — The requirement of public
instrument is imposed as a prerequisite to registration, and
registration is necessary as “a condition for the issuance of licenses
to engage in business or trade. In this way, the tax liabilities of big
partnerships cannot be evaded and the public can also determine
more accurately their membership and capital before dealing
with them.” (IV Capistrano, Civil Code of the Phils., p. 260.)
(3) When partnership considered registered. — The Securities
and Exchange Commission performs the works of a mercantile
registrar insofar as the recording of articles of partnership is
concerned. Since the recording of articles of partnership is not for
the purpose of giving the partnership juridical personality (see
Art. 1784.), the only objective of the law is to make the recorded
instrument open to all and to give notice thereof to interested
parties.
This objective is achieved from the date the partnership
papers are presented to and left for record in the Commission. For
this reason, when the certificate of recording of the instrument is
issued on a date subsequent to the date of presentation thereof,
its effectivity retroacts as of the latter date. In other words, the
date the partnership papers are presented to and left for record
in the Commission is considered the effective date of registration
of the articles of partnership. (SEC Opinion, Feb. 8, 1962 and Feb.
5, 1963.) This conforms with the ordinary rule of jurisprudence
that: “Ordinarily, an instrument is deemed to be recorded when
it is deposited with the proper office for the purpose of being
recorded.” (Ibid.)
ART. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an
inventory of said property is not made, signed by the
parties, and attached to the public instrument. (1668a)
Partnership with contribution
of immovable property.
(1) Requirements. — Where immovable property, regardless of
its value, is contributed, the failure to comply with the following
66
PARTNERSHIP
Art. 1773
requirements will render the partnership contract void in so far
as the contracting parties are concerned:
(a) The contract must be in a public instrument (Art.
1771.); and
(b) An inventory of the property contributed must
be made, signed by the parties, and attached to the public
instrument.
(2) As to contracting parties. — The absence of either formality
renders the contract void. Although Article 1771 does not
expressly state that without the public instrument the contract
is void, Article 1773 is very clear that the contract is void if
the formalities specifically provided therein are not observed,
implying that compliance therewith is absolute and indispensable
for validity.
(3) As to third persons. — Article 1773 is intended primarily to
protect third persons. With regard to them, a de facto partnership
or partnership by estoppel may exist. (see Art. 1825.) There is
nothing to prevent the court from considering the partnership
agreement an ordinary contract from which the parties’ rights
and obligations to each other may be inferred and enforced.
(Torres vs. Court of Appeals, 320 SCRA 428 [1999].)
When inventory is not required.
An inventory is required only “whenever immovable property
is contributed.” Hence, Article 1773 does not apply in the case
of immovable property which may be possessed or even owned
by the partnership but not contributed by any of the partners.
Thus, it has been held that a partnership contract which states
that the partnership is established “to operate a fishpond” (not
“to engage in a fishpond business”) is not rendered void because
no inventory of the fishpond was made where it did not clearly
and positively appear in the articles of partnership that the real
property had been contributed by anyone of the partners. (Agad
vs. Mabolo and Agad & Co., 23 SCRA 1223 [1968].)
If personal property, aside from real property, is contributed,
the inventory need not include the former.
Art. 1774
GENERAL PROVISIONS
67
Importance of making inventory of real
property in a partnership.
Article 1773 complements Article 1771.
(1) An inventory is very important in a partnership to show
how much is due from each partner to complete his share in the
common fund and how much is due to each of them in case of
liquidation. (Tablason vs. Bollozas, [C.A.] 51 O.G. 1966.)
(2) The execution of a public instrument of partnership
would be useless if there is no inventory of immovable property
contributed because without its description and designation,
the instrument cannot be subject to inscription in the Registry
of Property, and the contribution cannot prejudice third
persons. This will result in fraud to those who contract with the
partnership in the belief of the efficacy of the guaranty in which
the immovables may consist. Thus, the contract is declared
void by law when no such inventory is made. (11 Manresa 278279; Republic Engineering Works and Manufacturing Co. vs.
Alcantara, et al., 13 C.A. Rep. 221; Torres vs. Court of Appeals,
320 SCRA 428 [1999].)
ART. 1774. Any immovable property or an interest therein may be acquired in the partnership
name. Title so acquired can be conveyed only in the
partnership name. (n)
Acquisition or conveyance of property
by partnership.
Since a partnership has juridical personality separate from
and independent of that of the persons or members composing it
(Art. 1768.), it is but logical and natural that immovable property
may be acquired in the partnership name. Title so acquired can,
therefore, be conveyed only in the partnership name. (see Art. 46.)
The legal effects of conveyance of property standing in the name
of the partnership executed by a partner in the partnership name
or in his own name are governed by Article 1819, paragraphs one
and two.
PARTNERSHIP
68
Art. 1775
The right of a partnership to deal in real as well as personal
property is subject to limitations and restrictions prescribed
by the Constitution (see Art. XIV, Secs. 3, 5, 8, 9, 11 thereof.)
and special laws. A partnership is an “association” within the
meaning of the word as used in the Constitution.
ART. 1775. Associations and societies, whose articles are kept secret among the members, and wherein
any one of the members may contract in his own name
with third persons, shall have no juridical personality,
and shall be governed by the provisions relating to coownership. (1669)
Secret partnerships without juridical
personality.
The partnership relation is created only by the voluntary
agreement of the partners. (Art. 1767.) It is essential that the
partners are fully informed not only of the agreement but of all
matters affecting the partnership. (Art. 1806.) Likewise, a partner
is considered the agent of his co-partners and of the partnership
in respect of all partnership transactions. (Art. 1803.) Every
partnership must have a firm name under which it shall conduct
its business (Art. 1815.) and to distinguish it from the partners
and other partnerships. (Art. 1768.) The partners have equal
rights and interests in the partnership (Art. 1810.) which must
be established for the common benefit or interest of the partners.
(Art. 1770, par. 1.)
In view of the above, associations26 whose articles or agreements are kept secret among the members (i.e., known to some
members only but withheld from the rest) and wherein anyone
of them may contract in his own name with third persons are, by
this article, deprived of juridical personality for evidently such
Sec. 15. Entity without juridical personality as defendant. — When two or more persons not organized as an entity with juridical personality enter into a transaction, they
may be sued under the name by which they are generally or commonly known.
In the answer of such defendant, the names and addresses of the persons composing
said entity must all be revealed. (Rule 3, Rules of Court.)
26
Art. 1776
GENERAL PROVISIONS
69
associations are not partnerships. As among themselves, they
shall be governed by the provisions relating to co-ownership.
Importance of giving publicity to articles
of partnership.
It is essential that the articles of partnership be given publicity
for the protection not only of the members themselves but also
third persons from fraud and deceit to which otherwise they
would be easy victims. A member who transacts business for the
secret partnership in his own name becomes personally bound to
third persons unaware of the existence of such association, in the
same way and for the same reason that an agent who acts in his
own name when dealing with third persons is directly bound in
favor of such persons who may only sue or be sued by the agent
and not his principal. (see Art. 1883.)
But a person may be held liable as a partner or partnership
liability may result in favor of third persons by reason of estoppel.
(see Art. 1825.)
ART. 1776. As to its object, a partnership is either
universal or particular.
As regards the liability of the partners, a partnership may be general or limited. (1671a)
Classifications of partnership.
(1) As to the extent of its subject matter. — A partnership may
be:
(a) Universal partnership or one which refers to all the
present property or to all profits. (Art. 1777.)
There are thus two kinds of universal partnership, to wit:
(1) Universal partnership of all present property. This
is defined in Article 1778; and
(2) Universal partnership of profits. This is defined in
Article 1780;
PARTNERSHIP
70
Art. 1776
or
(b) Particular partnership. — This is defined in Article
1783.
(2) As to liability of the partners. — It may be:
(a) General partnership or one consisting of general
partners who are liable pro rata and subsidiarily (Art. 1816.)
and sometimes solidarily (Arts. 1822-1824.) with their
separate property for partnership debts; or
(b) Limited partnership or one formed by two or more
persons having as members one or more general partners and
one or more limited partners, the latter not being personally
liable for the obligations of the partnership. (Art. 1843.)
(3) As to its duration. — It is either:
(a) Partnership at will or one in which no time is specified
and is not formed for a particular undertaking or venture and
which may be terminated at anytime by mutual agreement of
the partners, or by the will of any one partner alone; or one for
a fixed term or particular undertaking which is continued by
the partners after the termination of such term or particular
undertaking without express agreement (see Art. 1785.); or
(b) Partnership with a fixed term or one in which the
term for which the partnership is to exist is fixed or agreed
upon or one formed for a particular undertaking, and upon
the expiration of the term or completion of the particular
enterprise, the partnership is dissolved, unless continued by
the partners. (Ibid.)
(4) As to the legality of its existence. — It may be:
(a) De jure partnership or one which has complied with all
the legal requirements for its establishment (see Arts. 1772,
par. 2; 1773.); or
(b) De facto partnership or one which has failed to comply
with all the legal requirements for its establishment. (Ibid.)
(5) As to representation to others. — It may be:
(a) Ordinary or real partnership or one which actually
exists among the partners and also as to third persons; or
Art. 1776
GENERAL PROVISIONS
71
(b) Ostensible partnership or partnership by estoppel or one
which in reality is not a partnership, but is considered a
partnership only in relation to those who, by their conduct or
admission, are precluded to deny or disprove its existence.
(Art. 1825.)
EXAMPLE:
Suppose A, B, and C are not really partners, but A told X
that he (A), B, and C are partners. X, believing the representation
made by A and consented to by B, extended credit to A.
As against A and B, A, B, and C constitute a partnership
by estoppel. But as against C, there is no partnership and X
cannot hold him liable as a partner. When the debt matures,
X is entitled to collect only from A and B who are liable as
partners although not actually partners.
(6) As to publicity. — It may be:
(a) Secret partnership or one wherein the existence of
certain persons as partners is not avowed or made known to
the public by any of the partners; or
(b) Open or notorious partnership or one whose existence is
avowed or made known to the public by the members of the
firm. (68 C.J.S. 400.)
(7) As to purpose. — It may be:
(a) Commercial or trading partnership or one formed for
the transaction of business27 (Art. 1767.); or
27
A trading partnership, generally, is one which buys and sells; but buying and selling need not be its sole purpose, nor even its characteristic feature. A partnership for the
operation of a manufacturing or mechanical business is nonetheless a trading partnership since buying and selling in the market is one of its incidents. (Marsh, Merwin &
Lemmon vs. Wheeler, 77 Conn. 449.) Trading partners naturally conceive the employment of capital, credit, and the usual instrumentalities of trade. Non-trading partnerships
do not. So one partner in a law firm cannot bind the firm by a note given to pay a firm
debt. But usages of trade may supply the power in one partner of a non-trading firm to
bind the others by the issuance of negotiable instruments. (Teller, op. cit., p. 63, citing
Smith vs. Sloan, 37 Wis. 285; Dowling vs. Exchange Bank of Boston, 145 U.S. 512.)
Under American law, a partner in a trading partner has generally more powers of
representation than a partner in a non-trading partnership.
PARTNERSHIP
72
Art. 1776
(b) Professional or non-trading partnership or one formed
for the exercise of a profession. (Ibid.)
Kinds of partners.
Partners are classified according to their interests in the
partnership business, or their obligations to the partnership, or
their liabilities to third persons.
(1) Under the Civil Code. — Partners28 are classified into:
(a) Capitalist partner or one who contributes money or
property to the common fund (see Art. 1767.);
(b) Industrial partner or one who contributes only his
industry or personal service (Arts. 1789, 1767.);
(c) General partner or one whose liability to third persons
extends to his separate property; he may be either a capitalist
or industrial partner. (see Arts. 1843, 1816.) He is also known
as real partner;
(d) Limited partner or one whose liability to third persons
is limited to his capital contribution. (see Art. 1843.) He is
also known as special partner. The terms “general partner”
and “limited partner” have relevance only in a limited
partnership;
(e) Managing partner or one who manages the affairs
or business of the partnership; he may be appointed either
in the articles of partnership or after the constitution of the
partnership. (see Art. 1800.) He is also known as general or
real partner;
(f) Liquidating partner or one who takes charge of the
winding up of partnership affairs upon dissolution (see Art.
1836.);
(g) Partner by estoppel or one who is not really a partner,
not being a party to a partnership agreement, but is liable as a
partner for the protection of innocent third persons. (see Art.
1825.) He is one who is represented as being in fact a partner,
28
The term is also used to designate various relationships such as companions,
fellow workers, or close friends. (31 Words and Phrases 271.)
Art. 1776
GENERAL PROVISIONS
73
but who is not so as between the partners themselves. He is
also known as partner by implication or nominal partner.
The term “quasi-partner” is sometimes used (68 C.J.S.
405.);
(h) Continuing partner or one who continues the business
of a partnership after it has been dissolved by reason of the
admission of a new partner, or the retirement, death, or
expulsion of one or more partners (see Art. 1840.);
(i) Surviving partner or one who remains after a
partnership has been dissolved by the death of any partner
(see Art. 1842.); and
(j) Subpartner or one who, not being a member of the
partnership, contracts with a partner with reference to the
latter’s share in the partnership. (see Art. 1804.)
(2) Other classifications. — They have also been classified into:
(a) Ostensible partner or one who takes active part and
known to the public as a partner in the business (see Art.
1834, par. 2.), whether or not he has an actual interest in the
firm. Thus, he may be an actual partner or a nominal partner.
If he is not actually a partner, he is subject to liability by the
doctrine of estoppel (Art. 1825.);
(b) Secret partner or one who takes active part in the
business but is not known to be a partner by outside parties
nor held out as a partner by the other partners (Ibid.), although
he participates in the profits and losses of the partnership. He
is an actual partner. He is also an active partner in the sense
that he participates in the management of the partnership
affairs;
(c) Silent partner or one who does not take any active part
in the business although he may be known to be a partner.
(Ibid.) Thus, he need not be a secret partner. If he withdraws
from the partnership, he must give notice to those persons
who do business with the firm to escape liability in the future;
(d) Dormant partner or one who does not take active part
in the business and is not known or held out as partner. (see
Art. 1834, par. 2.) He would be both a silent and a secret
74
PARTNERSHIP
Arts. 1777-1779
partner. He would be both a secret and a silent partner. He
may retire from the partnership without giving notice and
cannot be held liable for obligations of the firm subsequent
to his withdrawal. His only interest in joining the partnership
would be the sharing of the profits earned.
The term is used as synonymous with “sleeping partner”
(68 C.J.S. 404.);
(e) Original partner or one who is a member of the partnership from the time of its organization;
(f) Incoming partner or a person lately, or about to be,
taken into an existing partnership as a member (68 C.J.S. 404;
see Arts. 1826, 1828.); and
(g) Retiring partner or one withdrawn from the partnership; a withdrawing partner. (68 C.J.S. 404-405; see Arts. 1840,
1841.)
All partners in any of these six classes are subject to liability
for all partnership obligations. (see Arts. 1816, 1822-1824, 1826,
1835, 1844, 1841.)
ART. 1777. A universal partnership may refer to all
the present property or to all the profits. (1672)
ART. 1778. A partnership of all present property is
that in which the partners contribute all the property
which actually belongs to them to a common fund, with
the intention of dividing the same among themselves,
as well as all the profits they may acquire therewith.
(1673)
ART. 1779. In a universal partnership of all present property, the property which belongs to each of the
partners at the time of the constitution of the partnership, becomes the common property of all the partners,
as well as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any
other profits may also be made; but the property which
the partners may acquire subsequently by inheritance,
Arts. 1777-1779
GENERAL PROVISIONS
75
legacy or donation cannot be included in such stipulation, except the fruits thereof. (1674a)
Universal partnership of all present
property explained.
A universal partnership of profits is one which comprises all
that the partners may acquire by their industry or work during
the existence of the partnership and the usufruct29 of movable or
immovable property which each of the partners may possess at
the time of the celebration of the contract.
In this kind of partnership, the following become the common
property of all the partners:
(1) Property which belonged to each of them at the time of
the constitution of the partnership; and
(2) Profits which they may acquire from the property contributed.
EXAMPLE:
A and B are partners in a partnership known as X & Co.
They agreed that they would contribute all their properties to
a common fund for the purpose of dividing the same between
themselves, as well as the profits to be derived therefrom. A
contributed all his properties consisting of two big parcels of
agricultural land and a tractor. B contributed also his properties
consisting of P100,000.00 cash and farm implements.
The partnership formed by the contract of A and B is a
universal partnership of all present property.
Contribution of future property.
As a general rule, future properties cannot be contributed.
The very essence of the contract of partnership that the properties contributed be included in the partnership requires the contribution of things determinate. The position of a partner is like
that of a donor, and donations cannot comprehend future prop29
Art. 562. Usufruct gives a right to enjoy the property of another with the obligation
of preserving its form and substance, unless the title constituting it or the law otherwise
provides. (467)
PARTNERSHIP
76
Art. 1780
erty. (Art. 751.) Thus, property subsequently acquired by (1) inheritance, (2) legacy, or (3) donation cannot be included by stipulation except the fruits thereof. Hence, any stipulation including
property so acquired is void.
Profits from other sources (not from the properties contributed) will become common property only if there is a stipulation.
ART. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership.
Movable or immovable property which each of the
partners may possess at the time of the celebration of
the contract shall continue to pertain exclusively to each,
only the usufruct passing to the partnership. (1675)
Universal partnership of profits
explained.
A universal partnership of profits is one which comprises all
that the partners may acquire by their industry or work during
the existence of the partnership and the usufruct of movable or
immovable property which each of the partners may possess at
the time of the celebration of the contract.
(1) Ownership of present and future property. — It is to be
noted that in this class of partnership, the partners retain their
ownership over their present and future property. What passes
to the partnership are the profits or income and the use or
usufruct of the same. Consequently, upon the dissolution of the
partnership, such property is returned to the partners who own
it. (11 Manresa 303.)
EXAMPLE:
In the preceding example, if the agreement of A and B is
that they would retain the ownership over their respective
properties, only their usufruct being transferred to partnership
X & Co., and that they would divide equally the net profits
realized during the existence of the partnership, then the
partnership formed is a universal partnership of profits.
Art. 1781
GENERAL PROVISIONS
77
Upon the dissolution of the partnership, the properties
shall be returned to the respective owners. The amount of
P100,000 contributed by B shall be paid to him as a loan to the
partnership.
(2) Profits acquired through chance. — Since the law speaks
only of profits which the partners may acquire by their industry
or work, it follows that profits acquired by the partners through
chance, such as lottery or by lucrative title without employment
of any physical or intellectual efforts, are not included.
(3) Fruits of property subsequently acquired. — In view of
paragraph 2, fruits of property subsequently acquired by the
partners do not belong to the partnership. Such profits may,
however, be included by express stipulation. But profits which
the partners may acquire by their industry or work during
the existence of the partnership as well as the usufruct of their
present properties belong to the partnership as a matter of right.
An express stipulation is necessary to exclude any of them. (11
Manresa 308-310.)
ART. 1781. Articles of universal partnership, entered
into without specification of its nature, only constitute a
universal partnership of profits. (1676)
Presumption in favor of universal
partnership of profits.
Where the articles of partnership do not specify the nature
of the partnership, whether it is one of “present property” or
of “profits” only, it will be presumed that the parties intended
merely a partnership of profits. The reason for this presumption
is that a universal partnership of profits imposes less obligations
on the partners,30 since they preserve the ownership of their
separate property.
30
Art. 1378. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. x x x.
PARTNERSHIP
78
Art. 1782
It is to be noted that this article applies only when a universal
partnership has been organized.
ART. 1782. Persons who are prohibited from giving
each other any donation or advantage cannot enter into
a universal partnership. (1677)
Limitations upon the right to form
a partnership.
Persons who are prohibited by law to give donations cannot
enter into a universal partnership for the reason that each of
the partners virtually makes a donation. To allow persons who
are prohibited to give each other any donation or advantage to
form a universal partnership will be like permitting them to do
indirectly what the law expressly prohibits.
A partnership formed in violation of this article is null
and void. (Art. 1409[7].) Consequently, no legal personality is
acquired.
A husband and his wife, however, may enter into a particular
partnership or be members thereof. (see Commissioner of
Internal Revenue vs. Suter, 27 SCRA 152 [1969].)
ILLUSTRATIVE CASE:
In a particular partnership composed of three members, two of
the partners got married and the third partner subsequently sold, for
a nominal amount, his share to them.
Facts: A, B, and C formed a limited partnership to engage,
among other activities, in the importation, marketing and
operation of automatic phonographs, radios, television sets
and amusement machines, their parts and accessories, with B
and C as limited partners. Subsequently, A and B got married
and, thereafter, C sold his share to A and B. For a taxable year, A
and B filed a separate income return for the limited partnership
and a consolidated return for them as spouses.
The Commissioner of Internal Revenue consolidated the
income of the firm and the individual income of the partners
Art. 1782
GENERAL PROVISIONS
79
resulting in the determination of a deficiency income tax. A and
B protested the assessment. The issues are:
Issues: (1) Whether or not the separate personality of the
partnership should be disregarded for income tax purposes
considering that A and B actually formed a single taxable unit;
and
(2) Whether or not the partnership was dissolved after the
marriage of A and B and the subsequent sale to them by C of
the latter’s participation for the amount of P1.00.
Held: (1) Partners retained their separate interests. — The
view that by the marriage of A and B the company became a
single proprietorship is erroneous. Their capital contributions
were separately owned and contributed by them before
their marriage; and after they were joined in wedlock, such
contributions remained their respective separate property.
(see Art. 148[1], Civil Code.31) Thus, the individual interest of
A and B did not become common property of both after their
marriage. The change in the membership of the firm is no
ground for withdrawing the partnership from the coverage of
Section 24 of the National Internal Revenue Code requiring it
to pay income tax. A and B did not enter into matrimony and
thereafter buy the interests of C with the premeditated scheme
or design to use the partnership as a business conduit to dodge
the tax laws.
(2) Partnership, a particular one. — The firm was not a
universal partnership, but a particular one. It follows that the
partnership was not one that A and B were forbidden to enter
under Article 1677. (now Art. 1782.) Nor could the subsequent
marriage of the partners operate to dissolve it, such marriage
not being one of the causes provided for that purpose by law.
(Commissioner of Internal Revenue vs. Suter, supra.)
In connection with Article 1782, the following provisions
must be noted:
“Art. 87. Every donation or grant of gratuitous advantage,
direct or indirect, between the spouses during the marriage
shall be void, except moderate gifts, which the spouses may
31
Now, Art. 109, Family Code.
80
PARTNERSHIP
Art. 1783
give to each other on the occasion of any family rejoicing.
The prohibition shall also apply to persons living together as
husband and wife without a valid marriage.” (Family Code.)
“Art. 739. The following donations shall be void:
(1) Those made between persons who were guilty of
adultery or concubinage at the time of the donation;
(2) Those made between persons found guilty of the
same criminal offense, in consideration thereof;
(3) Those made to a public officer or his wife, descendants
and ascendants, by reason of his office.32
In the case referred to in No. 1, the action for declaration of
nullity may be brought by the spouse of the donor or donee;
and the guilt of the donor and the donee may be proved by
preponderance of evidence in the same action.” (Civil Code.)
In order that Article 739 may apply, it is not required that
there be a previous conviction for adultery or concubinage. This
can be inferred from the clause that “the guilt of the donor and
the donee may be proved by preponderance of evidence.’’ (The
Insular Life Assurance Co., Ltd. vs. Ebrado, 80 SCRA 181 [1977].)
ART. 1783. A particular partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation.
(1678)
Particular partnership explained.
The above article defines a particular partnership. In other
words, it is a partnership which is neither a universal partnership
of present property nor a universal partnership of profits.
The fundamental difference between a universal partnership
and a particular partnership lies in the scope of their subject
matter or object. In the former, the object is vague and indefinite,
contemplating a general business with some degree of continuity,
32
There seems to be no reason why the prohibition should not also apply to the husband of a public officer.
Art. 1783
GENERAL PROVISIONS
81
while in the latter, it is limited and well-defined, being confined
to an undertaking of a single, temporary, or ad hoc nature.
Examples of particular partnerships are those formed for
the acquisition of an immovable property for the purpose of
reselling it at a profit or for the common enjoyment of its use
and the benefits derived therefrom, or those established for
the purpose of carrying out a specific enterprise such as the
construction of a building, or those formed for the practice of
a profession or vocation. (11 Manresa, 318-319.) Hence, two
or more persons as accountants associating themselves in the
practice of accountancy or two or more lawyers in the practice
of law form a particular partnership. “A firm engaged, among
other activities, in the importation, marketing, distribution and
operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories” is a particular
partnership. (Commissioner of Internal Revenue vs. Suter, supra.)
Business of partnership need not be
continuing in nature.
It may be inferred from Articles 1767 and 1783 that the
carrying on of a business of a continuing nature is not essential to
constitute a partnership. An agreement to undertake a particular
piece of work or a single transaction or a limited number of
transactions and immediately divide the resulting profits would
seem to fall within the meaning of the term “partnership” as
used in the law.
(1) Rule under American law. — The above is not true under
the Uniform Partnership Act which defines a partnership as “an
association of two or more persons to carry on as co-owners a
business for profit” (Sec. 6 thereof.) and states that “business
includes every trade, occupation, or profession.” (Sec. 2 thereof.)
The word “business,” as used in the Act, clearly means business in the commercial sense only, not merely “a joint venture’’
which exists for carrying on a single act or isolated transaction
or a limited number of transactions. Thus, a distinction exists between a joint venture, a legal concept of common law origin, on
which the members are interested only in a single transaction,
PARTNERSHIP
82
Art. 1783
and is thus of a temporary nature although the business of conducting it may continue for a number of years, and a partnership
in which the members (partners) are interested in carrying on together of a general and continuing business of a particular kind.
(2) Joint venture. — Sometimes called “joint adventure’’ or
“joint enterprise’’ in American law, it is essentially a partnership
created for a limited purpose. While a joint venture is not a formal
partnership in the legal or technical sense, both are governed,
subject to certain qualifications, practically by the same rules or
principles of partnership.33 This is logical since in a joint venture,
like in a partnership, there is a community of interest in the
business and a mutual right of control and an agreement to share
jointly in profits and losses resulting from the enterprise.
The usual rules as regards the construction and operation
of contracts generally apply to a contract of a joint venture.
(Aurbach vs. Sanitary Wares Manufacturing Corp., 180 SCRA
130 [1989]; Litonjua, Jr. vs. Litonjua, Sr., 477 SCRA 576 [2005]; see
Philex Mining Corp. vs. Comm. of Internal Revenue, 551 SCRA
428 [2008].)
A particular partnership has been distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of
informal partnership, with no firm name and no legal personality. In a joint account, the
participating merchants can transact business under their own name, and can be individually liable therefor.
(b) Usually, but not necessarily, a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to a successful termination may continue
for a number of years; a partnership generally relates to a continuing business of various
transactions of a certain kind.
A joint venture “presupposes generally a parity of standing between the joint coventures or partners, in which each party has an equal proprietary interest in the capital
or property contributed, and where each party exercises equal rights in the conduct of the
business. (Heirs of Tan Eng Kee vs. Court of Appeals, 341 SCRA 740 [2000].) Nonetheless,
in Aurbach (supra.), the Supreme Court expressed the view that a joint venture may be
likened to a particular partnership. (see Primelink Properties & Development Corp. vs.
Lazatin-Magat, 493 SCRA 444 [2006].)
Kilosbayan vs. Guingona (232 SCRA 110 [1994].) defines a joint venture as “an association of persons or companies jointly undertaking some commercial enterprise; generally,
all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith,
and [a] duty which may be altered by agreement to share both in profits and losses.’’ (see
Information Technology Foundation vs. Commission on Elections, 419 SCRA 141 [2004].)
33
Art. 1783
GENERAL PROVISIONS
83
(3) Corporation as a partner. — While under the Philippine
Civil Code, a joint venture is a form of partnership with a legal personality separate and distinct from the parties composing
it, and should thus be governed by the law of partnership, the
Supreme Court has, however, recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may, however,
engage in a joint venture with others (Tuazon vs. Bolanos, 95
Phil. 906 [1954].) through a contract or agreement if the nature of
the venture is authorized by its charter. (SEC Opinion, April 29,
1985.)
— oOo —
PARTNERSHIP
84
Chapter 2
OBLIGATIONS
OF THE PARTNERS
SECTION 1. — Obligations of the Partners
Among Themselves.
Relations created by a contract
of partnership.
A contract of partnership gives rise to at least four distinct
juridical relations, namely:
(1) Relations among the partners themselves;
(2) Relations of the partners with the partnership;
(3) Relations of the partnership with third persons with
whom it contracts; and
(4) Relations of the partners with such third persons.
EXAMPLE:
If A and B formed a partnership called X & Co., and it
transacts business with Y, a third person, the relations created
will be as follows: relations between A and B; relations between
A and B on the one hand and X & Co. on the other hand;
relations between X & Co. and Y, and relations between A and
B on the one hand and Y on the other hand.
Rights and obligations, in general,
of partners inter se.
(1) Partnership relationship essentially one of mutual trust and
confidence. — The partnership relationship is essentially one of
84
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
85
mutual trust and confidence, and the law imposes upon the
partners highest standards of integrity and good faith in their
dealings with each other for the benefit of the partnership.
(a) Each partner is, in one sense, a trustee and at the
same time, a cestui que trust. He is a trustee to the extent that
his duties bind him with respect to his co-partners and the
partnership, and a cestui que trust as far as the duties that rest
on his co-partners. (Allen vs. Steinberg, 223 A.d. 240.) This
relationship is as much the same as the one existing between
the principal and agent because, technically, the partnership
is the principal and each partner is an agent of the partnership
and every other partners with respect to partnership affairs.
(b) The many particular rights and duties to each other
are, in reality, but aspects of the broad fiduciary relation.
These particular duties are expressly defined by law subject
to any modifying agreement between the partners themselves
(40 Am. Jur. 137, 208.), though its provisions will not in
many cases be effective as to third persons dealing with the
partnership.
(2) Fiduciary relationship remains until partnership terminated.
— The relation of trust applies also to matters concerned with the
formation of the partnership (Art. 1807.), and when a partnership
is dissolved, the assets of the partnership must still be managed
in accordance with this fiduciary principle. The obligation of
partners to act with the utmost candor and good faith in their
dealings between themselves is not lessened by the existence of
strained relations between them or the existence of any condition
which might in and of itself justify the firm’s dissolution. The
fiduciary obligation of a partner remains until the relationship
is terminated (Fouchek vs. Janicek, 225 P. 2d 783; Johnson vs.
Peckham, 120 S.W. 2d 786.) and the equities between the partners
adjusted and satisfied.
(3) Relationship in a limited partnership. — The rights and
obligations of the partners as to each other are provided on the
theory that a partner is both a principal and an agent in relation
to his co-partners. (see Art. 1818.) But the relationship between
a limited partner and the other partners in a limited partnership
PARTNERSHIP
86
Art. 1784
does not involve the element of trust and confidence, as in the
case of a general partnership. (see Art. 1866.)
ART. 1784. A partnership begins from the moment
of the execution of the contract, unless it is otherwise
stipulated. (1679)
Commencement and term of partnership.
(1) A partnership is a consensual contract; hence, it exists
from the moment of the celebration of the contract by the
partners.1 (see Art. 1315.) Since under Article 1784, a partnership
commences from the time of execution of the contract if there is
no contrary stipulation as to the date of effectivity of the same,
its registration in the Securities and Exchange Commission is not
essential to give it juridical personality.
(2) The birth and life of a partnership is predicated on the
mutual desire and consent of the parties. (see Ortega vs. Court
of Appeals, 245 SCRA 529 [1995].) Unlike a corporation, no time
limit is prescribed by law for the life of partnership. Hence, the
partners may fix in their contract any term and they shall be
bound to remain under such a relation for the duration of the term
barring the occurrence of any of the events causing dissolution of
the partnership before its expiration. (Arts. 1830-1831.)
Rules governing partnership relation.
What is necessary for the existence of a partnership is that
the essential requisites of a contract of partnership are present
even when the partners have not yet actually begun the carrying
on of its business or given their contributions, or even though its
conditions or details, such as the participation of the partners in
the profits and losses and the nature of the partnership, have not
yet been fixed, as they pertain to the accidental and not to the
essential parts of the contract.
A general partnership, as distinguished from a limited partnership (see Art. 1843.),
may result from an oral contract except those partnerships by the terms of the agreement
are to be formed by the parties for more than one (1) year from the making thereof, in
which case the partnership agreement must be in writing as required by the Statute of
Frauds. (Art. 1403[2, a].)
1
Art. 1784
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
87
Where a partnership relation results, the law itself fixes the
incidents and consequences of this relation (supra.) if the parties
fail to do so. (Fernandez vs. De la Rosa, 1 Phil. 671 [1902].) This
is true although the parties thereto actually call their relation
something other than a partnership or even go as far as to state
expressly that they are not partners.
Executory agreement of partnership.
The above rule on the commencement of a partnership is not
absolute.
(1) Future partnership. — The partners may stipulate some
other date for the commencement of the partnership. Persons
who have entered into a contract to become partners at some
future time or on the happening of some future contingency do
not become partners until or unless the agreed time has arrived
or the contingency has happened. As long as the agreement for a
partnership remains inchoate or unperformed, the partnership is
not consummated. (68 C.J.S. 418; Urra vs. Ponce, [C.A.] 59 O.G.
244.)
Hence, there can be a future partnership which at the
moment has no juridical existence yet. In the absence of express
stipulation, evidence is admissible to show the commencement
date as determined by the words, acts or conduct of the parties.
Incidentally, the Statute of Frauds provides that an agreement
that by its terms is not to be performed within a year from the
making thereof, must be in writing and signed by the party
charged in order to be enforceable. (Art. 1403[2, a].)
(2) Agreement to create partnership. — There is a marked
distinction between a partnership actually consummated and
an agreement to enter into a contract of partnership at a future
time. A partnership in fact cannot be predicated on an agreement
to enter into a co-partnership at a future day unless it is shown
that such an agreement was actually consummated. So long as
the agreement remains executory the partnership is inchoate, not
having called into being by the concerted action necessary under
the partnership agreement. (40 Am. Jur. 142.)
88
PARTNERSHIP
Art. 1785
The death of either party to an executory agreement of partnership prevents the formation of a firm, since such agreement is
based on the continuance of the life of each. (68 C.J.S. 419.)
(3) Failure to agree on material terms. — A failure of the parties
to agree on material terms may not merely be evidence of the
intent of the parties to be bound only in the future, but may
prevent any rights or obligations from arising on either side for
lack of complete contract. (7 C.J.S. 391; Limuco vs. Calinao, [C.A.]
No. 10099-R, Sept. 30, 1953.)
Article 1784 must be read in relation to Articles 1771 and
1773.
ART. 1785. When a partnership for a fixed term or
particular undertaking is continued after the termination of such term or particular undertaking without any
express agreement, the rights and duties of the partners
remain the same as they were at such termination, so far
as is consistent with a partnership at will.
A continuation of the business by the partners or
such of them as habitually acted therein during the
term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n)
Continuation of partnership beyond
fixed term.
A partnership with a fixed term is one in which the term of its
existence has been agreed upon expressly (as when there is a
definite period) or impliedly (as when a particular enterprise or
transaction is undertaken). The expiration of the term thus fixed
or the accomplishment of the particular undertaking specified
(or the demonstration of the impossibility of its accomplishment)
will cause the automatic dissolution of the partnership. (Art.
1830[1, a].)
(1) Rights and duties of partners. — The partnership, however,
may be extended or renewed by the partners by express
Art. 1785
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
89
agreement, written or oral, or impliedly, by the mere continuation
of the business after the termination of such term or particular
undertaking without any settlement or liquidation. In such case,
the rights and duties of the partners remain the same as they
were at such termination but only insofar as is consistent with a
partnership at will. (See Art. 1776.)
In other words, with such continuation, the partnership for
a fixed term or particular undertaking is dissolved and a new
one, a partnership at will, is created by implied agreement the
continued existence of which will depend upon the mutual desire
and consent of the partners. Thus, for example, the manner of
management and profit-sharing ratio originally agreed upon shall
still govern but the partnership having become a partnership at
will may be lawfully terminated at any time by the express will
of all the partners or any of them. (see Art. 1830[1, b, c].)
(2) Dissolution of partnership. — Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of a partnership at
will. He must, however, act in good faith not that the attendance
of bad faith can prevent the dissolution of the partnership (see
Art. 1830[1, b].) but that can result in a liability for damages to
the other partners. (Art. 1830[2]; see Art. 1837, par. 2; Ortega vs.
Court of Appeals, 245 SCRA 529 [1995].) Implicit in good faith
is the requirement that the dissolution must not be made at an
improper or unreasonable time.
Even a partnership for a fixed term may likewise be terminated
by the express will of any partner before the time mentioned. (Art.
1830[2].) There is no such thing as an indissoluble partnership.
Continuation of partnership
for an indefinite term.
(1) Partnership for a term impliedly fixed. — Although the
term of a partnership is not expressly fixed, an agreement of the
parties may evidence an understanding that the relation should
continue until the accomplishment of a particular undertaking or
certain things have been done or have taken place.
(a) When a partner advances a sum of money to a partnership with the understanding that the amount contributed
90
PARTNERSHIP
Art. 1785
is to be loaned to the partnership and is to be repaid as soon
as feasible from the prospective profits of the business, the
partnership is for the term reasonably required to repay the
loan. The partners may impliedly agree to continue in business until a certain sum of money is earned, or one or more
partners recoup their investment, or until certain debts are
paid, or until certain property could be disposed of on favorable terms.
In each of these cases, however, the implied agreement
must be proved.
(b) In each of the following cases the court properly
held that the partners’ implied promise was to continue
the partnership for a term reasonably required to allow
the partnership to earn sufficient money to accomplish the
understood objective:
1) where the partners borrowed substantial amounts
of money to launch an enterprise and there was an understanding that the loans would be repaid from partnership profits (Owen vs. Owen, 119 P. 2d 713.);
2) where one partner loaned his co-partner money to
invest in the partnership with the understanding that the
money would be repaid from partnership profits (Vangel
vs. Vangel, 254 P. 2d 919.);
3) where one partner contributed all the capital, the
other contributed his services, and it was understood
that upon the repayment of the contributed capital
from partnership profits the partner who contributed
his services would receive a one-third interest in the
partnership assets (Mervyn Investment Co. vs. Beber, 194
P 1037.); and
4) where the parties entered into a joint venture to
build and operate a motel until it could be sold upon
favorable and mutually satisfactory terms. (Shannon vs.
Hudson, 325 P. 2d 1022.)
(2) Partnership with mere expectation that business will be
profitable. — Where the understanding to which defendant (the
Art. 1786
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
91
partner who contended that the partnership created was for
a term) testified was no more than a common hope that the
partnership earnings would pay for all the necessary expenses,
such a hope does not establish even by implication a “fixed term
or particular undertaking” as required by Article 1785. The mere
expectation that the business would be successful and that the
partners would be able to recoup their investment is not sufficient
to create a partnership for a term. All partnerships are ordinarily
entered into with the hope or expectation that they will be
profitable, but that alone does not make them all partnerships for
a term and obligate the partners to continue in the partnership
until all the losses over a period of many years may have been
recovered. (Cohen vs. Cohen, 119 P. 2d 713.)
ART. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute
thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate things
which he may have contributed to the partnership, in
the same cases and in the same manner as the vendor
is bound with respect to the vendee. He shall also be
liable for the fruits thereof from the time they should
have been delivered, without the need of any demand.
(1681a)
Obligations with respect to contribution
of property.
The above article deals with the obligations of the partners
among themselves and to the partnership with respect to
contribution of property. They are as follows:
(1) To contribute at the beginning of the partnership or at the
stipulated time the money, property, or industry which he may
have promised to contribute;
(2) To answer for eviction in case the partnership is deprived
of the determinate property contributed; and
92
PARTNERSHIP
Art. 1786
(3) To answer to the partnership for the fruits of the property
the contribution of which he delayed, from the date they should
have been contributed up to the time of actual delivery.
In addition, the partner has the obligation:
(4) To preserve said property with the diligence of a good
father of a family pending delivery to the partnership (Art. 1163.);
and
(5) To indemnify the partnership for any damage caused to
it by the retention of the same or by the delay in its contribution.
(Arts. 1788, 1170.)
The money or property contributed by a partner becomes
the property of the partnership. It necessarily follows that the
same cannot be withdrawn or disposed of by the contributing
partner without the consent or approval of the partnership or of
the other partners. (Lozana vs. Depakakibo, 107 Phil. 728 [1960].)
Effect of failure to contribute property
promised.
The mutual contribution to a common fund being of the
essence of the contract of partnership (Art. 1767.), for without
the contributions the partnership is useless, it is but logical that
the failure to contribute is to make the partner ipso jure a debtor
of the partnership even in the absence of any demand. (see Art.
1169[1].)
Under this article, the remedy of the other partner or the
partnership is not rescission but an action for specific performance
(to collect what is owing) with damages and interest from the
defaulting partner from the time he should have complied with
his obligation. (Art. 1788.) Article 1191, which refers to resolution
of reciprocal obligations in general, is not applicable. Articles
1786 and 1788 specifically refer to the contract of partnership in
particular; and it is a well-known principle that special provisions
prevail over general provisions. (Sancho vs. Lizaraga, 55 Phil. 60
[1930]; see, however, Uy vs. Puzon, 79 SCRA 598 [1977], cited
under Art. 1788.)
Art. 1786
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
93
Article 1838, however, allows rescission or annulment of a
partnership contract on the ground of fraud or misrepresentation
committed by one of the parties thereto.
Liability of partner in case of eviction.
The partner is bound in the same cases and in the same manner
as the vendor is bound with respect to the vendee with regard to
specific and determinate things which he may have contributed
to the partnership. This matter is, therefore, governed by the law
on sales.
Under the law on sales, eviction shall take place whenever
by a final judgment based on a right prior to the sale or an act
imputable to the vendor, the vendee is deprived of the whole or
a part of the thing purchased.2 This obligation of warranty in case
of eviction is in consequence of the character of the contract of
partnership which is an onerous contract. (Art. 1767.)
Liability of partner for fruits of property
in case of delay.
Here, again, no demand is necessary to put the partner in
default.
Art. 1547. In a contract of sale, unless a contrary intention appears, there is:
(1) An implied warranty on the part of the seller that he has a right to sell the thing
at the time when the ownership is to pass, and that the buyer shall from that time have
and enjoy the legal and peaceful possession of the thing;
(2) An implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer.
This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the
sale of a thing in which a third person has a legal or equitable interest. (n)
Art. 1548. Eviction shall take place whenever by a final judgment based on a right
prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or
of a part of the thing purchased.
The vendor shall answer for the eviction even though nothing has been said in the
contract on the subject.
The contracting parties, however, may increase, diminish, or suppress this legal obligation of the vendor. (1475a)
xxx
xxx
xxx
Art. 1557. The warranty cannot be enforced until a final judgment has been rendered, whereby the vendee loses the thing acquired or part thereof. (1480)
Art. 1558. The vendor shall not be obliged to make good the proper warranty, unless
he is summoned in the suit for eviction at the instance of the vendee. (1481a)
2
PARTNERSHIP
94
Art. 1786
From the mere fact that the property which a partner ought
to deliver does not pass to the common fund on time, the
partnership fails to receive the fruits or benefits which the said
contribution produced as well as those it ought to produce, thus
prejudicing the common purpose of obtaining from them the
greatest possible profits through some means of speculation or
investment. The injury, therefore, to the partnership is constant.
(see 11 Manresa 332-335.)
Liability of partner for failure to perform
service stipulated.
Is a partner who fails to perform the personal services which
he has stipulated to render to the partnership, liable to the other
partners for the value of the services?
(1) Partner generally not liable. — Unless there is a special
agreement to that effect, the partners are not entitled to charge
each other, or the partnership of which they are members, for
their services in the firm business. The doctrine seems to be that
every partner is bound to work to the extent of his ability for
the benefit of the whole, without regard to the services of his copartners, however unequal in value or amount, and to require a
partner to account for the value of his services would be, in effect,
allowing compensation to the other members of the partnership
for the services they rendered.3
(2) Exception. — The general rule that partners are not
entitled to compensation for their services is inapplicable where
the reason of it fails.
(a) If a partner neglects or refuses, without reasonable
cause, to render the service which he agreed to perform
by reason of which the partnership suffered loss, no good
reason can be suggested why the erring partner should not
be just as responsible for the breach of his agreement to
render personal service to the partnership as for the breach
of any other stipulation in the partnership contract. (Marsh’s
Appeal, 69 Pa. St. 30.)
See “Compensation for services rendered” under Article 1800.
3
Art. 1787
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
95
(b) If the partner is compelled to make good the loss,
each member of the firm, including himself, will receive his
proportion of the amount in the distribution of the partnership assets, and in no just sense can this be regarded as compensation for the services individually rendered. The proper
measure of damages in such case is the value of the services
wrongfully withheld. (Ibid.)
(c) If under the circumstances of the case the proper
measure of the damages or loss (which may include unrealized
profits) is the value of the services wrongfully withheld, then
the defendant should be charged this value. If the defendant
had made profit by engaging in other business in violation of
the contract, he is liable to account for the same. (Ibid.)
ART. 1787. When the capital or a part thereof which
a partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners,
and according to current prices, the subsequent changes
thereof being for the account of the partnership. (n)
Appraisal of goods or property
contributed.
(1) The appraisal of the value of the goods contributed is
necessary to determine how much has been contributed by
the partners. In the absence of an stipulation, the share of each
partner in the profits and losses is in proportion to what he may
have contributed. (Art. 1797.)
The appraisal is made, firstly, in the manner prescribed by the
contract of partnership; secondly, in the absence of stipulation, by
experts chosen by the partners and according to current prices.
After the goods have been contributed, the partnership bears
the risk or gets the benefit of subsequent changes in their value.
(2) In the case of immovable property, the appraisal is made
in the inventory of said property (see Arts. 1773, 1795.); otherwise,
96
PARTNERSHIP
Art. 1788
it may be made as provided in Article 1787. There is no reason
why the rule in Article 1787 should not also apply with respect to
other kinds of property.
ART. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a
debtor for the interest and damages from the time he
should have complied with his obligation.
The same rule applies to any amount he may have
taken from the partnership coffers, and his liability
shall begin from the time he converted the amount to
his own use. (1682)
Obligations with respect to contribution of money
and money converted to personal use.
This article contemplates two distinct cases. The first
paragraph refers to money promised but not given on time and
the second, to partnership money converted to the personal use
of the partner.
The following are the obligations of the partners with respect
to the partnership capital under Article 1788:
(1) To contribute on the date due the amount he has
undertaken to contribute to the partnership;
(2) To reimburse any amount he may have taken from the
partnership coffers and converted to his own use;
(3) To pay the agreed or legal interest, if he fails to pay his
contribution on time or in case he takes any amount from the
common fund and converts it to his own use; and
(4) To indemnify the partnership for the damages caused to
it by the delay in the contribution or the conversion of any sum
for his personal benefit.
Liability of guilty partner for interest
and damages.
The guilty partner is liable for interest and damages not from
the time judicial or extrajudicial demand is made but from the
Art. 1788
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
97
time he should have complied with his obligation or from the
time he converted the amount to his own use, as the case may be.
Unless there is a stipulation fixing a different time, this obligation
of a partner to give his promised contribution arises from the
commencement of the partnership, that is, upon perfection of the
contract.
This double responsibility of the partner is an exception to
the general rule in damages that in obligations consisting in the
payment of a sum of money, the indemnity for damages shall
be only the payment of interest agreed upon or, in the absence
of stipulation, the legal interest.4 (Art. 2209.) It is in harmony
with the principle laid down in Article 1794 that every partner
is responsible to the partnership for damages5 suffered by it
through his fault and is justified by the nature of the contract of
partnership.
In a case, a partner in a construction venture, who, contrary to
the terms of the partnership, failed to contribute his share in the
capital of the partnership, was ordered by the court to reimburse
his co-partner whatever amount the latter invested in or spent for
the partnership on account of the construction projects. (Uy vs.
Puzon, 79 SCRA 598 [1977]; see Moran, Jr. vs. Court of Appeals,
133 SCRA 88 [1984].)
Liability of partner for failure to return
partnership money received.
(1) Where fraudulent misappropriation committed. — A
partner is guilty of estafa (Art. 315, Revised Penal Code.) if he
misappropriates partnership money or property received by him
for a specific purpose of the partnership. (Liwanag vs. Court of
Appeals, 281 SCRA 1225 [1997].)
(2) Where there was mere failure to return. — The mere failure
on the part of an industrial partner to return to the capitalist
Now 12%.
Under Article 2200 of the Civil Code, indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee
failed to obtain. In other words, lucrum lessans is also a basis for indemnification. (Uy vs.
Puzon, 79 SCRA 598 [1977].)
4
5
98
PARTNERSHIP
Art. 1789
partner the capital brought by him into the partnership is not
an act constituting the crime of estafa. The money having been
received by the partnership, the business commenced and profits
accrued, the action that lies with the partner who furnished
capital for the recovery of his money is a civil one arising from
the partnership contract for a liquidation of the partnership and
a levy on its assets if there should be any. (U.S. vs. Clarin, 17 Phil.
84 [1910]; see also People vs. Alegre, 48 O.G. 534 [1952].)
In this case, there was mere failure on the part of the industrial
partner to liquidate partnership affairs and to account to persons
interested the amounts respectively due them. A partner is
guilty of estafa if he fraudulently appropriates partnership
property delivered to him, with specific directions to apply it to
partnership purposes. (People vs. Campos, supra.)
ART. 1789. An industrial partner cannot engage in
business for himself unless the partnership expressly
permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm
or avail themselves of the benefits which he may have
obtained in violation of this provision, with a right to
damages in either case. (n)
Obligations of industrial partner.
An industrial partner is one who contributes his industry, labor,
or services to the partnership. He is considered the owner of his
services, which is his contribution to the common fund. (Limuco
vs. Calina, [C.A.] No. 10099-R, Sept. 9, 1953, citing Padilla’s Civil
Code, pp. 225-226, Vol. 3, 1951 ed.)
Unless the contrary is stipulated, he becomes a debtor of
the partnership for his work or services from the moment the
partnership relation begins. In effect, the partnership acquires an
exclusive right to avail itself of his industry. Consequently, if he
engages in business for himself, such act is considered prejudicial
to the interest of the other partners.
An action for specific performance to compel the partner
to perform the promised work or service is not available as a
Art. 1790
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
99
remedy because this will amount to involuntary servitude
which, as a rule, is prohibited by the Constitution. (Art. III, Sec.
18[2] thereof.)
Prohibition against engaging in business.
(1) As regards an industrial partner. — The prohibition is
absolute and applies whether the industrial partner is to engage
in the same business in which the partnership is engaged or in
any kind of business. It is clear that the reason for the prohibition
exists in both cases, which is to prevent any conflict of interest
between the industrial partner and the partnership and to
insure faithful compliance by said partner with his prestation.
(Evangelista & Co. vs. Abad Santos, 51 SCRA 416 [1973].)
(2) As regards capitalist partners. — The prohibition extends
only to any operation which is of the same kind of business in
which the partnership is engaged unless there is a stipulation to
the contrary. (Art. 1808.)
Remedies where industrial partner
engages in business.
If the industrial partner engages in business for himself,
without the express permission of the partnership, the capitalist
partners have the right either to exclude him from the firm or to
avail themselves of the benefits which he may have obtained. In
either case, the capitalist partners have a right to damages. Note
that the permission given must be express; hence, mere toleration
by the partnership will not exempt the industrial partner from
liability.
Although the law mentions only the capitalist partners, it is
believed that industrial partners are also entitled to the remedy
granted since they are equally prejudiced by the act of their copartner engaging in business for himself.
ART. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the
capital of the partnership. (n)
100
PARTNERSHIP
Art. 1791
Extent of contribution to partnership
capital.
The partners can stipulate the contribution of unequal shares
to the common fund, but in the absence of such stipulation, the
presumption is that their contribution shall be in equal shares.
This principle is just and reasonable and is consistent with the
rule that partners are deemed to have equal rights and obligations. (Art. 1770, par. 1.)
Obviously, the above rule is not applicable to an industrial
partner unless, besides his services, he has contributed capital
pursuant to an agreement to that effect. (see Art. 1797, par. 2.)
ART. 1791. If there is no agreement to the contrary,
in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner,
to save the venture, shall be obliged to sell his interest
to the other partners. (n)
Obligation of capitalist partner to contribute
additional capital.
As a general rule, a capitalist partner is not bound to
contribute to the partnership more than what he agreed to
contribute but in case of an imminent loss of the business, and
there is no agreement to the contrary, he is under obligation to
contribute an additional share to save the venture. If he refuses
to contribute, he shall be obliged to sell his interest to the other
partners.
(1) Requisites for application of rule. — The following are the
requisites before a capitalist partner may be obliged to sell his
interest to the others:
(a) There is an imminent loss of the business of the
partnership;
(b) The majority of the capitalist partners are of the
opinion that an additional contribution to the common fund
would save the business;
Art. 1792
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
101
(c) The capitalist partner refuses deliberately (not
because of his financial inability to do so), to contribute an
additional share to the capital; and
(d) There is no agreement that even in case of an imminent loss of the business the partners are not obliged to contribute.
It is to be noted that the industrial partner is exempted
from the requirement to contribute an additional share.
Having contributed his entire industry, he can do nothing
further.
(2) Reason for the sanction. — The refusal of the partner to
contribute his additional share reflects his lack of interest in the
continuance of the partnership. It would be unjust for him to
remain and reap the benefits of the efforts of the others while he
himself refuses to help. Hence, the law provides a remedy which,
incidentally, is just to both parties since the partner who refuses
to contribute is paid the value of his interest while the other
partners are thereby relieved from the burden of continuing their
association with him in the business.
ART. 1792. If a partner authorized to manage collects a demandable sum, which was owed to him in his
own name, from a person who owed the partnership
another sum also demandable, the sum thus collected
shall be applied to the two credits in proportion to their
amounts, even though he may have given a receipt for
his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be
fully applied to the latter.
The provisions of this article are understood to be
without prejudice to the right granted to the debtor by
Article 1252, but only if the personal credit of the partner should be more onerous to him. (1684)
Obligation of managing partner
who collects debt.
Where a person is separately indebted to the partnership
and to the managing partner at the same time, any sum received
PARTNERSHIP
102
Art. 1792
by the managing partner shall be applied to the two credits in
proportion to their amounts, except where he received it for the
account of the partnership, in which case the whole sum shall be
applied to the partnership credit only.
(1) Requisites for application of rule. — The following are the
requisites for the application of this article:
(a) There exist at least two debts, one where the collecting
partner is creditor, and the other, where the partnership is the
creditor;
(b) Both debts are demandable; and
(c) The partner who collects is authorized to manage and
actually manages the partnership.
EXAMPLE:
A and B are partners in X and Co., with A as the managing
partner. C is indebted to A in the sum of P2,000.00. C is also
indebted to the partnership in the sum of P4,000.00. Both debts
are demandable. A collects the amount of P1,500.00 from C.
If A issues a receipt to the effect that it is in payment of
his (A’s) credit, P500.00 will be applied only to his credit,
the partnership being entitled to a proportionate amount of
P1,000.00 in the payment made by C. But if A gives a receipt
for the account only of the partnership credit, the amount of
P1,500.00 will be fully applied to the latter.
(2) Reason for applying payment to partnership credit. — The
law safeguards the interests of the partnership by preventing the
possibility of their being subordinated by the managing partner
to his own interest to the prejudice of the other partners. Good
faith demands that the partner vested with the management of
the partnership attend more to the interest of the partnership
than to his own and he should not intentionally fail to effect the
collection of the credit of the partnership in order to effect the
collection of his own. (11 Manresa 351.)
The article does not apply where the partner who collects for
his own credit only is not authorized to manage, for there can
be no ground for suspicion that he may have acted improperly
Art. 1793
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
103
to create an undue advantage to himself. However, where the
manner of management has not been agreed upon and all the
partners participate in the management of the partnership (see
Art. 1803.), then every partner shall be considered a managing
partner for purposes of Article 1792.
(3) Right of debtor to application of payment. — Under the
second paragraph, the debtor is given the right to prefer payment
of the credit of the partner if it should be more onerous to him in
accordance with his right to application of payment. (Art. 1252.6)
EXAMPLE:
In the example given above, if the obligation in favor
of A bears 18% interest per annum while that in favor of the
partnership is 16% interest per annum, the credit of A being
more onerous or burdensome, the law allows C to prefer the
payment of A’s credit in case he so desires.
ART. 1793. A partner who has received, in whole or
in part, his share of a partnership, when the other partners have not collected theirs, shall be obliged, if the
debtor should thereafter become insolvent, to bring to
the partnership capital what he received even though
he may have given receipt for his share only. (1685a)
Obligation of partner who receives
share of partnership credit.
The case contemplated under this article is different from that
referred to in Article 1792, which treats of two distinct credits, one
in favor of the partnership and another in favor of the managing
partner. In the present article, there is only one credit — credit in
favor of the partnership. Furthermore, the present article applies
whether the partner who receives his share of the partnership
credit is authorized to manage or not.
Art. 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of them the same must
be applied. Unless the parties so stipulate, or when the application of payment is made by
the party for whose benefit the term has been constituted, application shall not be made
as to debts which are not yet due.
6
PARTNERSHIP
104
Art. 1793
(1) Requisites for application of rule. — The requisites for the
application of this article are as follows:
(a) A partner has received, in whole or in part, his share
of the partnership credit;
(b) The other partners have not collected their shares;
and
(c) The partnership debtor has become insolvent.
EXAMPLE:
D owes partnership X and Co. P4,500.00. A, a partner,
received a share of P1,500.00 ahead of B and C, the two other
partners. When B and C were collecting from D, the latter was
already insolvent.
In this case, even if A had given a receipt for his share only,
he can be required to share the P1,500.00 with B and C.
(2) Reason for imposing obligation to return. — The debt of D
becomes a bad debt. It would be unjust or unfair for A not to
share in the loss with B and C or for him to obtain more and
B and C, less. The above provision is based on the community
of interest among the partners, which is one of the underlying
principles of the contract of partnership. (11 Manresa 353; Art.
1770, par. 1.)
Credit collected after dissolution
of the partnership.
Does the obligation of the partner to bring to the partnership
capital what he has collected refer only to that collected during
the existence of the partnership, or does it also refer to that
collected after the dissolution of the same?
(1) Obligation to bring amount collected to the partnership
fund. — For example, upon the dissolution of the partnership,
a partnership credit is divided among the partners in such a
manner that each partner assumes the responsibility of collecting
the portion pertaining to him. One of them who is more diligent
collects the share corresponding to him before the debtor
becomes insolvent. May the other partners demand that he bring
Art. 1794
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
105
to the partnership fund what he had been able to collect and
that said amount so collected be divided among the partners in
proportion to their respective shares?
Some commentators answer this question in the affirmative,
basing their answer in the community and equality which ought
to exist among all the partners.
(2) Contrary view. — Manresa and Ricci believed otherwise.
Their reasons are:
(a) It would not be just that he who has been diligent
and collected his quota should suffer the consequence of the
negligence of his associates, thus making him responsible for
the default of the latter.
(b) Upon the dissolution of the partnership, the tie that
unites the partnership ceases. This being the case, the reason
for the obligation disappears. Article 1793 presupposes that
there exists a partnership capital. Upon the dissolution of
the partnership and the return to each principal of what
he contributed, the community of interest between them
disappears altogether and it cannot be said that there is still a
partnership capital or common property. If a common credit
remains among the partners after the dissolution of the
partnership, there would be among them a mere simple credit
owned in common but not a partnership credit. (Espiritu and
Sibal, op. cit., citing 11 Manresa 352-353.)
ART. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault,
and he cannot compensate them with the profits and
benefits which he may have earned for the partnership
by his industry. However, the courts may equitably
lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership,
unusual profits have been realized. (1686a)
Obligation of partner for damages
to partnership.
This article follows the general rule applicable to all contracts
that any person guilty of negligence or fault in the fulfillment
106
PARTNERSHIP
Art. 1795
of his obligation shall be liable for damages. (Art. 1170.) The
partner’s fault, however, must be determined in accordance with
the nature of the obligation and the circumstances of the person,
the time, and the place. (Art. 1173.)
Compensation of damages with profits earned
for partnership by guilty partner.
(1) Damages not generally subject to set-off. — As a general rule,
the damages caused by a partner to the partnership cannot be
offset by the profits or benefits which he may have earned for the
partnership by his industry.
(a) The partner has the obligation to secure benefits for
the partnership. Hence, the profits which he may have earned
pertain as a matter of law or right, to the partnership.
(b) He has also the obligation to exercise diligence in the
performance of his obligation as a partner. Consequently,
inasmuch as a partner is a debtor to the partnership for his
industry, and at the same time is obliged to repair the injury
which he might have occasioned through his fault, there
can not be any compensation. Compensation requires that
the negligent partner be both a creditor and a debtor of the
partnership. (Art. 1278; 11 Manresa 356-357.)
Of course, the amount of insurance, if any, received by the
partnership shall be deducted from the liability of the erring
partner.
(2) Exception. — If unusual profits are realized through
the extraordinary efforts of the partner at fault, the courts may
equitably mitigate or lessen his liability for damages. This rule
rests on equity. Note that even in this case, the partner at fault is
not allowed to compensate such damages with the profits earned.
The law does not specify as to when profits may be considered
“unusual.” The question depends upon the circumstances of the
particular case.
ART. 1795. The risk of specific and determinate
things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the
Art. 1795
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
107
common benefit, shall be borne by the partner who
owns them.
If the things contributed are fungible, or cannot be
kept without deteriorating, or if they were contributed
to be sold, the risk shall be borne by the partnership. In
the absence of stipulation, the risks of things brought
and appraised in the inventory, shall also be borne by
the partnership, and in such case the claim shall be limited to the value at which they were appraised. (1687)
Risk of loss of things contributed.
There are five cases contemplated by the present article for
the determination of the risk of the things contributed to the
partnership, namely:
(1) Specific and determinate things which are not fungible where
only the use is contributed. — The risk of loss is borne by the partner
because he remains the owner of the things (like car);
(2) Specific and determinate things the ownership of which is
transferred to the partnership. — The risk of loss is for the account
of the partnership, being the owner;
(3) Fungible7 things or things which cannot be kept without
deteriorating even if they are contributed only for the use of the
partnership. — The risk of loss is borne by the partnership for
evidently the ownership was being transferred since use is
impossible without the things (e.g., oil, wine) being consumed or
impaired;
(4) Things contributed to be sold. — The partnership bears risk
of loss for there cannot be any doubt that the partnership was
intended to be the owner; otherwise, the partnership could not
effect the sale; and
(5) Things brought and appraised in the inventory. — The
partnership bears the risk of loss because the intention of the
The more appropriate term is “consumable.”
Art. 418. Movable property is either consumable or non-consumable. To the first
class belong those movables which cannot be used in a manner appropriate to their nature without their being consumed; to the second class belong all the others. (337)
7
108
PARTNERSHIP
Art. 1796
parties was to contribute to the partnership the price of the things
contributed with an appraisal in the inventory. There is thus an
implied sale making the partnership owner of the said things,
the price being represented by their appraised value.
The above presuppose that the things contributed have been
delivered actually or constructively to the partnership. Before
delivery, the risk of loss is borne by the partner since he remains
their owner. He is a debtor of the partnership for whatever he
may have promised to contribute. (Art. 1786; see Arts. 712, 1164,
1262, 1263.) If the loss is due to the fault of any of the partners, he
shall be liable for damages to the partnership in accordance with
the provision of the preceding article.
ART. 1796. The partnership shall be responsible to
every partner for the amounts he may have disbursed
on behalf of the partnership and for the corresponding
interest, from the time the expenses are made; it shall
also answer to each partner for the obligations he may
have contracted in good faith in the interest of the partnership business, and for risks in consequence of its
management. (1688a)
Responsibility of the partnership
to the partners.
In the absence of any stipulation to the contrary, every partner
is an agent of the partnership for the purpose of its business. (Art.
1818.) Hence, the partnership has the obligation to:
(1) refund amounts disbursed by the partner in behalf of the
partnership plus the corresponding interest from the time the
expenses are made (not from the date of demand). Here, the law
refers to loans or advances made by a partner to the partnership
other than capital contributed by him;
(2) answer for the obligations the partner may have contracted
in good faith in the interest of the partnership business; and
(3) answer for risks in consequence of its management.
Being a mere agent, the partner is not personally liable,
provided, however, that he is free from all fault (see Art. 1912.)
Art. 1796
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
109
and he acted within the scope of his authority. (see Arts. 1897,
1898, 1910, par. 2.) But unlike an ordinary agent, he is not given
the right of retention if he is not reimbursed or indemnified. (see
Art. 1914.)
In the absence of an aggreement to the contrary, no partner
is entitled to compensation for his services to the partnership
without the consent of all the partners unless it can be implied
from the circumstances that the parties intended a partner to
receive additional compensation where the partner’s work was
beyond normal partnership functions. (infra.)
EXAMPLE:
The articles of a trading partnership composed of A, B, and
C provides that any purchase in excess of P5,000.00 must first be
approved by all the partners. This rule was strictly observed in
all transactions of the partnership. C made a purchase of goods
out of his personal funds for P7,000 without the knowledge of
A and B. The partnership incurred a loss.
C is not entitled to be reimbursed for the purchase.
ILLUSTRATIVE CASE:
A partner seeks an accounting from the other partners who
received from him money to be invested by them in a business.
Facts: A delivered P1,500.00 to B and C who, in a private
document, acknowledged the receipt of the money with the
agreement that “we are to invest the amount in a store, the
profits and losses of which we are to divide with the former in
equal shares.” A filed a complaint to compel B and C to render
an accounting of the partnership as agreed to.
Issue: From what date should the payment of interest be
counted?
Held: Inasmuch as in this case nothing appears other than
the failure to fulfill an obligation on the part of a partner who
acted as agent in receiving money for a given purpose, for
which he has rendered no accounting, such agent is responsible
only for the losses which, by a violation of the law, he incurred.
This being an obligation to pay in cash, there are no other losses
than the legal interest which interest is not due except from the
110
PARTNERSHIP
Art. 1797
time of the judicial demand (see Art. 2212.) or, in the present
case, from the filing of the complaint.
Article 1796 is not applicable insofar as it provides that
“the partnership shall be responsible to every partner for the
amounts he may have disbursed on behalf of the partnership
and for the corresponding interest from the time the expenses
are made,” for the reason that no other money than that
contributed as capital is involved. (Martinez vs. Ong Pong Co.,
14 Phil. 726 [1909].)
ART. 1797. The losses and profits shall be distributed in conformity with the agreement. If only the share
of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits,
the industrial partner shall receive such share as may be
just and equitable under the circumstances. If besides
his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital.
(1689a)
Rules for distribution of profits
and losses.
This article and the two succeeding ones regulate the distribution of profits and losses among the partners. They do not
refer to the liability of the partners to third persons which is governed by Article 1816.
(1) Distribution of profits:
(a) The partners share the profits according to their
agreement subject to Article 1799.
(b) If there is no such agreement:
1) The share of each capitalist partner shall be in
proportion to his capital contribution. This rule is based
on the presumed will of the partners.
Art. 1797
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
111
2) The industrial partner shall receive such share,
which must be satisfied first before the capitalist partners
shall divide the profits, as may be just and equitable under
the circumstances. The share of an industrial partner
in the profits is not fixed, as in the case of the capitalist
partners, as it is very difficult to ascertain the value of the
services of a person. Under the Code of Commerce (Art.
140 thereof.), the industrial partner was “placed in the
distribution in the same position as the capitalist partner
having the smallest interest.”
In a case, where two brothers engaged in a business
venture, with one furnishing the capital and the other
contributing his industry, the Supreme Court ruled that
“Justice and equity dictate that the two share equally the
fruit of their joint investment and efforts,” because it was
through the “industry and geniuses” of the industrial
partner that the property of the venture was developed
and improved into a valuable asset worth more than P22
million. (Ramnani vs. Court of Appeals, 196 SCRA 731
[1991].)
EXAMPLE:
A, B, and C formed a partnership, whereby each of
them contributed P30,000.00. They agreed that should the
partnership realize profits, the same shall be distributed in the
following proportions:
A, as managing partner ....................................
B ............................................................................
C ...........................................................................
40%
30%
30%
In this case, the partners shall share the profits in conformity
with their agreement. If there is no agreement with respect
to the share of each partner, then, they shall share the profits
equally.
Suppose, the contributions of the partners are as follows:
A
B
C
...........................................................
...........................................................
...........................................................
P 72,000.00
48,000.00
24,000.00
Total ..................................................
P144,000.00
112
PARTNERSHIP
Art. 1797
In the absence of stipulation, the share of each of the
partners shall be in proportion to his contribution, that is:
A ...........................................................................
3/6
B ............................................................................
2/6
C ...........................................................................
1/6
If D is an industrial partner, he shall receive such share as
may be just and equitable under the circumstances. Assuming
that the partnership makes a profit of P51,000.00, the partners
may determine considering all the circumstances, that D,
as industrial partner, is entitled to P6,000.00. The balance of
P45,000.00 will be divided among A, B and C in proportion to
their respective capital contributions: P22,500.00, P15,000.00
and P7,500.00, respectively.
Now, if D aside from his services, contributed P36,000, then
he will also share in the balance of P45,000.00 in proportion
to his contribution, which is 3/15 (P36,000.00/P180,000.00) or
P9,000.00, while A, B, and C will share P18,000.00, P12,000.00
and P6,000.00, respectively.
A partner is entitled to receive only his share of the profits
actually realized by the venture. Even when an assurance was
made by a partner that they would earn a huge amount of profits,
in the absence of fraud, the other partner cannot claim a right
to recover the profits promised where the business was highly
speculative and turned out to be a failure. Hidden risks in any
business venture have to be considered. (Moran, Jr. vs. Court of
Appeals, 133 SCRA 88 [1984].)
(2) Distribution of losses:
(a) The losses shall be distributed according to their
agreement subject to Article 1799.
(b) If there is no such agreement, but the contract provides
for the share of the partners in the profits, the share of each
in the losses shall be in accordance with the profit-sharing
ratio, but the industrial partner shall not be liable for losses.
The profits or losses of the partnership cannot be determined
by taking into account the result of one particular transaction
but of all the transactions had.
Art. 1798
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
113
(c) If there is also no profit-sharing stipulated in the contract, then losses shall be borne by the partners in proportion
to their capital contributions, but the purely industrial partner
shall not be liable for the losses.
EXAMPLE:
In the same example, the partners will share in the losses
in conformity with their agreement. If they failed to agree as
to the sharing of losses, the share of each partner in the losses
shall be in the same proportion stipulated with regard to the
share of each in the profits, to wit:
A ...........................................................................
B ............................................................................
C ...........................................................................
40%
30%
30%
If there is also no profit-sharing ratio stipulated, then
the losses shall be divided in proportion to their capital
contributions. D, however, being an industrial partner, shall
not be liable for losses but the same shall be borne by A, B,
and C, the capitalist partners. However, if D is also a capitalist
partner, then he shall share in the losses in proportion to his
contribution.
ART. 1798. If the partners have agreed to intrust to
a third person the designation of the share of each one
in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no
case may a partner who has begun to execute the decision of the third person, or who has not impugned the
same within a period of three months from the time he
had knowledge thereof, complain of such decision.
The designation of losses and profits cannot be
intrusted to one of the partners. (1690)
Designation by a third person of share
in profits and losses.
(1) Delegation to a third person. — The designation of the share
in the profits and losses may be delegated to a third person by
common consent. This article speaks of a third person, not a
114
PARTNERSHIP
Art. 1799
partner, following the general rule in contracts that the fulfillment
of a contract cannot be left to the will of one of the contracting
parties alone. (Arts. 1308, 1309.)
The prohibition in the second paragraph (Art. 1798.) is
necessary to guarantee the utmost impartiality in the distribution
of shares in the profits and losses. (11 Manresa 375.)
(2) Binding force of designation by third person. — The designation by the third person would generally be binding unless
manifestly inequitable. Even then, a partner who has begun to
execute the decision of the third person or who fails to impugn
the same within three months from the time he had knowledge
of it can no longer complain. In such case, the partner is guilty of
estoppel or is deemed to have given his consent or ratification to
the designation.
The reason behind the comparatively short period of three
months within which to impugn the designation is to forestall
any paralyzation in the operations of the partnership. (Ibid.)
ART. 1799. A stipulation which excludes one or
more partners from any share in the profits or losses is
void. (1691)
Stipulation excluding a partner from any
share in profits or losses.
(1) Stipulation generally void, but partnership subsists. — The
law does not, as a general rule, allow a stipulation excluding
one or more partners from any share in the profits and losses.
The partnership must exist for the common benefit and interest
of the partners. (Art. 1770.) Hence, such an agreement would
contravene the very purpose of a partnership contract, that
is, profit-sharing among the partners. However, although the
stipulation is void, the partnership, if otherwise valid, subsists
and the profits or losses shall be apportioned as if there were no
stipulation on the same. (see Art. 1797, par. 2.)
(2) Stipulation, a factor to show no partnership exists. — Where
the parties expressly stipulate that there shall be no liability for
Art. 1799
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
115
losses, or where from the nature of the contract, it is clear that
a party did not intend to share in the losses, such fact may be a
factor in determining that no partnership exists. Thus, in a case,
it was held that where one party sells personalty to another for
use in a business, and agrees in payment to take one-half of the
profits that might be made, he does not thereby agree to share in
the losses. (Danills vs. Fitch, 8 Pa. 495, cited in Teller, p. 17.)
(3) Where person excluded not intended by parties to become a
partner. — Where the one excluded from any share in the profits
or losses is not intended by the parties to become a partner, the
stipulation is, of course, valid. Thus, where one of several persons
engaged in an enterprise agreed to assist by advancing money,
and to share in the losses, if any, but not to receive any part of
the profits, which are to be divided among the others exclusively,
such one is not to be deemed a partner as between the others and
himself. However, if he holds himself out, or allows himself to
be held, as a partner to a third person who, under the belief that
he is such, enters into a contract with them, he is liable on such
contract. (31 Words and Phrases 282; see Art. 1825.)
(4) Where person excluded from losses is industrial partner. — With
reference to the industrial partner, since the law itself excludes
him from losses (Art. 1797, par. 2.), a stipulation exempting him
from the losses is naturally valid as an exception to the general
rule in Article 1799. This is without prejudice, however, to the
rights of third persons. (Art. 1817.) The industrial partner is not
liable for losses because he cannot withdraw the work or labor
already done by him, unlike the capitalist partners who can
withdraw their capital. Furthermore, if the partnership fails to
realize any profits, then he has labored in vain and in a real sense,
he has already contributed his share in the loss. (11 Manresa 377.)
(5) Where stipulation provides for unequal shares. — The limitation does not mean that the partners cannot stipulate for unequal
shares in the profits or losses even if their respective contributions are equal, unless the inequality is so gross that it is, in effect,
a simulated form or attempt to exclude a partner from any share
in the profits or losses. (see Espiritu and Sibal, op. cit., p. 113, citing 11 Manresa 377.)
116
PARTNERSHIP
Art. 1800
Stipulation exempting a partner from
losses should be allowed.
“The provision of Article 1799 which declares void an
agreement excluding one or more partners from sharing in the
losses of the partnership is difficult to explain. x x x. To declare
also void an agreement which merely exempts or tends to
exempt one or more partners from sharing or contributing in
the partnership losses as far as it affects the partners alone, is
without any foundation either on reason or justice; because if,
in order to induce a person to become a member of the firm, it
becomes necessary to guaranty him against his suffering any
financial losses thereby, without which guaranty such person
may not be willing to become a member of the partnership and
yet his connection thereto is considered as absolutely necessary
by the other partners willing to guaranty him against losses, such
partnership may never materialize on account of the provision of
said Article 1799.
It seems, therefore, that if a person can make a gift to another,
there is no sound reason why a person cannot also agree to bear
all the losses that a partnership may suffer, in order to exempt his
co-partners from sharing in the said losses.
Of course, as far as third persons are concerned, any agreement
which tends to excuse or exclude one or more partners from
satisfying the partnership liability caused through partnership
losses may be properly declared void.” (Espiritu and Sibal, op.
cit., pp. 172-173.)
ART. 1800. The partner who has been appointed
manager in the articles of partnership may execute all
acts of administration despite the opposition of his partners, unless he should act in bad faith; and his power
is irrevocable without just or lawful cause. The vote of
the partners representing the controlling interest shall
be necessary for such revocation of power.
A power granted after the partnership has been constituted may be revoked at any time. (1692a)
Art. 1800
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
117
Rights and obligations with respect
to management.
Unless the partnership agreement provides otherwise, each
partner in a general partnership has a right to an equal voice in
the conduct and management of the partnership business. This
right is not dependent on the amount or size of the partner’s
capital contribution or services to the business. Of course, the
partners may select a managing partner or make such allocation
of functions as the needs of the business dictate especially in a
large partnership.
Article 1800 speaks of two distinct cases of appointments.
(1) Appointment as manager in the articles of partnership. —
The partner appointed by common agreement in the articles of
partnership may execute all acts of administration (not those of
strict ownership such as those enumerated in Art. 1818, par. 3.)
notwithstanding the opposition of the other partners, unless he
should act in bad faith. His power is revocable only upon just and
lawful cause (see Art. 1920.) and upon the vote of the partners
representing the controlling interest.
The reason for this principle is that the revocation represents
a change in the terms of the contract. The law presumes that the
appointment thus constituted is, in effect, one of the conditions of
the contract and it is only logical that such appointment should
not be revoked without the consent of all the partners, including
the partner thus appointed. It is an elementary rule that no party
to a contract can violate the law of the contract without the
consent of the others. (11 Manresa 380.)
In case of mismanagement, the other partners may avail of
the usual remedies allowed by law, including an application for
dissolution of the partnership by a judicial decree. (see Art. 1831.)
(2) Appointment as manager after the constitution of the partnership. — But the management granted by the partners after the
partnership has been constituted independently of the articles of
partnership may be revoked at any time for any cause whatsoever.
The reason for this provision is that in such case, the revocation is not founded on a change of will on the part of the part-
118
PARTNERSHIP
Art. 1800
ners, the appointment not being a condition of the contract. It is
merely a simple contract of agency, which may be revoked at any
time. (Art. 1920.) It is believed that the vote for revocation must
also represent the controlling interest.
It should be noted that Article 1800 refers to a partner, not a
stranger, who has been appointed manager. As a rule, a partner
is not entitled to compensation for his services other than his
share of the profits.
Scope of power of a managing
partner.
As a general rule, a partner appointed as manager has all the
powers of a general agent as well as all the incidental powers
necessary to carry out the object of the partnership in the
transaction of its business. The exception is when the powers of
the manager are specifically restricted.
(1) Hence, unless expressly withheld, the minor power to
issue receipts is included in the general powers of the manager,
as this is in keeping with present day business dealings. (Ng Ya
vs. Sugbu Commercial Co., [C.A.] 50 O.G. 4913.)
(2) Similarly, the manager of a partnership engaged in
buying and selling is clothed with sufficient authority even
without approval of the other partners to purchase on credit, as
it is customary to buy and sell on credit. (Smith, Bell & Co. vs.
Aznar & Co., [C.A.] 40 O.G. 1882.)
(3) It has also been held that the managing partner has
authority to secure loans to complete the construction of a “casco”
for use in the business and necessary to carry out the express
object of the partnership (Agustin vs. Inocencio, 9 Phil. 135.); or
to dismiss an employee, particularly, when there is a justifiable
cause for dismissal as when the employee hurled at the manager
abusive and unsavory remarks in the presence of the customers
of the firm (Matela vs. Chua Sintek, [C.A.] No. 12165-R, April 6,
1965.); or to employ a bookkeeper although the contract made
was not in writing. (Fortis vs. Gutierrez Hermanos, 6 Phil. 100
[1906].)
(4) A partnership may sue or be sued in its name or by its
duly authorized representative. Thus, the managing partner
Art. 1800
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
119
may execute all acts of administration, including the right to sue
debtors of the partnership. (Tai Tong Chuache & Co. vs. Insurance
Commission, 158 SCRA 366 [1988].)
(5) But a partner designated as one of the managers to take
charge of “selling fish in Manila and the purchase of supplies”
has no authority to purchase for the partnership a “barge, a
truck and an adding machine,” inasmuch as neither of these
properties could be considered as “supplies for the partnership
business” (Teague vs. Martin, 53 Phil. 504 [1929].); nor can the
managing partner of a partnership formed for the purpose of
operating a tailoring shop sell or convey the tailoring shop which
is partnership property without the consent of all the partners.
(Santos vs. Villanueva, [C.A.] 50 O.G. 175.)
(6) A managing partner may not bind the partnership by a
contract wholly foreign to its business. Thus, he has no authority
to execute a mortgage on the firm’s property to secure the debt of
a third person for which the firm is not liable. (68 C.J.S. 577.)
Compensation for services rendered.
(1) Partner generally not entitled to compensation. — In the
absence of an agreement to the contrary, each member of the
partnership assumes the duty to give his time, attention, and
skill to the management of its affairs, so far, at least, as may be
reasonably necessary to the success of the common enterprise;
and for this service a share of the profits is his only compensation.
Each partner in taking care of the joint property, managing
the partnership affairs, and directing the partnership business
is practically taking care of his own interest or managing his
own business. He is not, in the absence of a contract, express or
implied, entitled to compensation beyond his share of the profits
for services rendered by him to the partnership business, although
the services rendered by him may be greater in proportion than
the services rendered by other members of the partnership, by
reason of having assumed the position of managing partner, or
even by reason of extra services necessitated by his partner’s
illness and consequent inability to render his own just share of
the services. (40 Am. Jur. 213.)
120
PARTNERSHIP
Art. 1800
In the absence of any prohibition in the articles of partnership
for the payment of salaries to general partners, there is nothing
to prevent the partners to enter into a collateral verbal agreement
to that effect.
(2) Exceptions. — In proper cases, however, the law may
imply a contract for compensation. Thus:
(a) A partner engaged by his co-partners to perform services not required of him in fulfillment of the duties which
the partnership relation imposes and in a capacity other than
that of a partner (e.g., to perform clerical services in carrying
on the business of the firm) is entitled to receive the compensation agreed upon therefor.
(b) A contract for compensation may be implied where
there is extraordinary neglect on the part of one partner
to perform his duties toward the firm’s business, thereby
imposing the entire burden on the remaining partner.
(c) One partner may employ his co-partner to do work
for him outside of and independent of the co-partnership,
and become personally liable therefor.
(d) Partners exempted by the terms of partnership from
rendering services to the firm may demand pay for services
rendered.
(e) Where one partner is entrusted with the management
of the partnership business and devotes his whole time and
attention thereto, at the instance of the other partners who
are attending to their individual business and giving no time
or attention to the business of the firm, the case presents
unusual conditions, is taken out of the general rule as to
compensation and warrants the implication of an agreement
to make compensation. In such cases, the amount of the
compensation depends, of course, upon the agreement of
the parties, express or implied, as well as upon the particular
circumstances of the case. (40 Am. Jur. 213-216.)
It has also been held that the way to deal with such a
situation or where a partner willfully fails to perform the
services which he agreed to perform, as a result of which the
other partners are burdened with greater work, is to calculate
Art. 1800
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
121
the value of the unperformed services, make it an asset of
the partnership chargeable against the defaulting partner,
and divide among all the partners (including the defaulting
partner) as any other partnership profit. (Teller, op. cit., p. 77,
citing Olivier vs. Uleberg, [N.D.] 23 N.W. [2d] 39.)
(f) The rule requiring services of partners without
compensation does not also apply where, by the contract
of partnership, one partner is exempted from the duty of
rendering personal services to the concerned, if he afterwards
does render such service at the instance and request of his
co-partners (Ibid., citing Lewis vs. Moffett, 11 Ill. 392.), or
where the services rendered are extraordinary. Thus, in a
case, the surviving partner who discovered a firm claim more
than thirteen years after the liquidating partner’s death,
and prosecuted it for four years to a successful conclusion
was allowed, because of the exceptional situation, extra
compensation. (Ibid., citing Zell’s Appeal, 126 Pa. 329.)
ILLUSTRATIVE CASE:
Under the contract, a partner was to receive a weekly amount
termed as “drawing account” from a partnership that was upon a
“50-50” basis, and he claimed that the amounts were received by him
as compensation for his services but there was no specific agreement
that he should receive salary.
Facts: A and B entered into a partnership under the name
of “New England Neon Sign Company” for the purpose of
manufacturing and selling neon signs. B agreed to furnish all
the necessary financial backing, and A was to receive $60 a
week, which was termed as a “drawing account.” A, who had
received over $15,000 instituted action for an accounting of the
partnership affairs. He claims that the money was received
as compensation for services. B contends that the money was
received as a partial distribution of profits.
It appears that the parties agreed “to go 50-50,” and,
in answer to the question to A as to whether it was his
understanding of the agreement that he was to be paid and
B was not to be paid for services, he replied: “We were to go
50-50.” When he answered this question, he knew that he had
received over $15,000 by way of a drawing account, and B had
never received anything by way of distribution of earnings.
122
PARTNERSHIP
Art. 1801
Issue: Should the money received by A be considered as
compensation for his services, or as partial distribution of
profits?
Held: As a partial distribution of profits. A was a glass
blower and was recommended to B as one who was familiar
with, and had the ability to build, neon signs. B was “to furnish
the necessary financial backing” and it is a reasonable inference
that A, in turn, was to devote himself to the manufacture, at
least, of the signs.
Under such arrangement and the specific agreement “to
go 50-50,” neither partner was entitled to compensation for
services in the absence of an express or implied agreement.
There was no specific agreement that A should receive any
salary, as such. A’s drawing account is a well-recognized
modern business method of furnishing the employee with
means of maintenance while engaged in a service from which
wages and commissions are to accrue. In any event, he did
not stipulate, in any terms, for the payment of any salary. He
was merely to receive a weekly amount, termed a “drawing
account,” from a partnership that was upon a “50-50” basis.
Upon all the findings, A’s drawing account was against
possible profits, and not by way of payment for his services.
(Boyer vs. Bowles, 37 N.E. 2d 489 [Mass. 1941].)
ART. 1801. If two or more partners have been
intrusted with the management of the partnership
without specification of their respective duties, or
without stipulation that one of them shall not act
without the consent of all the others, each one may
separately execute all acts of administration, but if
any of them should oppose the acts of the others, the
decision of the majority shall prevail. In case of tie,
the matter shall be decided by the partners owning the
controlling interest. (1693a)
Where respective duties of two or more
managing partners not specified.
(1) Each one may separately perform acts of administration. —
The rule in this case is that each one may separately perform acts
of administration.
Art. 1801
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
123
(a) If one or more of the managing partners shall oppose
the acts of the others, then the decision of the majority (per
head) of the managing partners shall prevail. Note that the
right to oppose can be exercised only by those entrusted with
the management of the partnership and not by any partner.
(b) In case of tie, the matter shall have to be decided by
the vote of the partners owning the controlling interest, that
is, more than 50% of the capital investment. (see Art. 492.)
When the articles of partnership do not specify the respective
duties of the partners and the limitations of management, one
partner has no more powers than the others in the conduct and
management of the firm’s business. If there is a specification of
the respective duties of the managing partners, the decision of
the partner concerned shall prevail subject only to the limitation
that he should act in good faith.
(2) Requisites for application of rule. — This article applies only
when the following requisites are present:
(a) Two or more partners have been appointed as
managers;
(b) There is no specification of their respective duties;
and
(c) There is no stipulation that one of them shall not act
without the consent of all the others.
EXAMPLES:
The respective interests of the partners in a partnership are
as follows: A — 5%; B — 10%; C — 15%; D — 15%; E — 20%;
and F — 35%.
(1) A, B, and E were appointed as managing partners
without specification of their respective duties. A contract
entered into by A, if with the conformity of B although against
the objection of E, is valid.
(2) If the managing partners are A, B, C, and E, and C sided
with E so that there was a tie and when the matter was put to
a vote of all the partners, A, B, and D were in favor, with C, E,
and F against, the contract is not valid; if A and E were the ones
who originally voted in favor of the contract and subsequently,
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PARTNERSHIP
Art. 1802
F sided with them, the transaction is deemed ratified by the
controlling interest in the partnership.
(3) Suppose after a tie, the voting is as follows: A, B, and F
— in favor, and C, D, and E — against, both sides representing
50% of the interest, with neither side willing to give way to the
other, what shall be the rule? The law is silent on this point. It
is believed that in such case the contract should be considered
as having been entered into without authority. In other words,
when the partners are equally divided, those who vote against
the contract or who resist change must prevail.
The best solution is for the partners to dissolve the
partnership. A shall be responsible for damages if it is found
that he was at fault. (see Art. 1794.)
If the contract is merely proposed, it may or may not be
entered into depending upon the decision of the majority of
the managing partners or of the controlling interest, as the case
may be.
ART. 1802. In case it should have been stipulated
that none of the managing partners shall act without
the consent of the others, the concurrence of all shall
be necessary for validity of the acts, and the absence or
disability of any one of them cannot be alleged, unless
there is imminent danger of grave or irreparable injury
to the partnership. (1694)
Where unanimity of action stipulated.
(1) Concurrence necessary for validity of acts. — The partners
may stipulate that none of the managing partners shall act without
the consent of the others. In such a case, the unanimous consent
of all the managing partners shall be necessary for the validity
of their acts. (see Art. 1818 as to rights of third persons.) This
consent is so indispensable that neither the absence nor disability
of any one of them may be alleged as excuse or justification to
dispense with this requirement.
The only exception is when there is an imminent danger of
grave or irreparable injury to the partnership, in which case, a
partner may act alone without the consent of the partner who is
Art. 1802
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
125
absent or under disability, without prejudice to his liability for
damages under Article 1794.
(2) Rule where there is opposition by a managing partner. — The
rule which authorizes any of the managing partners to proceed
alone without the consent of the other in case of “imminent
danger of grave or irreparable injury to the partnership” is
not applicable when one of the managers, in the exercise of his
right to oppose, objects to the proposed act. The reason is that
one of the essential conditions of the authority conferred on the
managing partner is that the management should be with the
consent of all the partners, and inasmuch as in this case such
unanimous consent is manifestly wanting, there is no doubt that
the proposed act is outside the scope of his authority. (Espiritu
and Sibal, op. cit., p. 127, citing 11 Manresa 388-389.)
ILLUSTRATIVE CASE:
A third person seeks the enforcement of a contract entered into by
a partner in violation of stipulation that none of the partners shall act
without the consent of the others.
Facts: A sold to B, one of the managing partners of
Partnership X, the other being C, a certain number of mining
claims without the consent of C. In an action by A to recover
the unpaid balance of the purchase price against Partnership X,
C claims that the contract is not binding upon the partnership
for the reason that under the articles of partnership, there is a
stipulation that one of the partners cannot bind the firm by a
written contract without the consent of the others.
Issue: Is the transaction made by B binding upon the
partnership?
Held: Yes. The stipulation undoubtedly creates an obligation
between the two partners, which consists in asking the other’s
consent before contracting for the partnership. This obligation,
of course, is not imposed upon a third person who contracts
with a partnership.
A third person may, and has a right to, presume that the
managing partners with whom he contracts has, in the ordinary
and usual course of business, the consent of his co-partner
for otherwise he would not enter into the contract. The third
person would naturally not presume that the partner with
126
PARTNERSHIP
Art. 1803
whom he enters into the transaction is violating the articles
of partnership but, on the contrary, is acting in accordance
therewith. The reason or purpose is no other than to protect a
third person who contracts with one of the managing partners
from fraud or deceit to which he can be an easy victim. (Litton
vs. Hill & Ceron, 67 Phil. 509 [1939].)
(3) Consent of managing partners not necessary in routine
transactions. — It has been held that where the business of the
partnership is to buy and sell merchandise of all kinds, an
industrial partner who is authorized to “manage, operate and
direct the affairs, businesses and activities of the partnership”
and “to make, sign, seal and execute and deliver contracts,
documents, x x x upon terms and conditions acceptable to
him duly approved in writing by the capitalist partners,” can
purchase “on credit” in the name of the firm certain goods,
regularly purchased by the company without first securing the
approval of the capitalist partners since it is usual or customary
to buy and sell on credit. Moreover, the authority to purchase
carries with it the implied authority to purchase on credit.
The requirement of written authority refers evidently to
formal and unusual written contracts. (Smith, Bell & Co. vs.
Aznar, [C.A.] 40 O.G. 1882.)
ART. 1803. When the manner of management has
not been agreed upon, the following rules shall be
observed:
(1) All the partners shall be considered agents and
whatever any one of them may do alone shall bind the
partnership, without prejudice to the provisions of
Article 1801.
(2) None of the partners may, without the consent
of the others, make any important alteration in the immovable property of the partnership, even if it may be
useful to the partnership. But if the refusal of consent
by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may
be sought. (1695a)
Art. 1803
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
127
Rules when manner of management
has not been agreed upon.
(1) All partners considered managers and agents. — The partners
may fail to designate who among them shall act as manager,
either when their contract is perfected or subsequently. In such
a case, all partners shall have equal rights in the management
and conduct of partnership affairs. This is true regardless of the
amount of their capital contributions or extent of their services
to the partnership. All of them shall be considered managers and
agents (Art. 1818.) and whatever any one of them may do alone
shall bind the partnership, subject, however, to the provision
of Article 1801 that in case of timely opposition of any partner,
the matter shall first be decided by the majority vote, for the
presumed intent is for all the partners to manage regardless of
the amount of capital they contributed. In case of a tie, then the
matter shall be decided by the vote of the partners representing
the controlling interest.
Article 1803(1) should be read in relation to Article 1818.
(par. 3.)
EXAMPLE:
Partnership X is composed of five members, A, B, C, D, and
E. In a suit brought by F against the partnership, F accepted an
offer of compromise from A, B, and C to settle the suit. Prior
to F’s acceptance of the offer, D and E informed F that they
opposed the offer.
Is the compromise binding upon the partnership?
No. Under Article 1803, in relation to Article 1801, the acts
of the majority shall prevail over the opposition of the minority
as to all matters within the scope of the partnership business
in the absence of any stipulation to the contrary. Under Article
1818 (par. 2[5].), however, except when authorized by the other
partners or unless they have abandoned the business, less than
all the partners have no authority to “enter into a compromise
concerning partnership claim or liability.”
The authority of the partners to bind the partnership
by contract under Article 1801(1) are limited to acts of
administration or, as expressed in Article 1818 (par. 1.), acts
“for apparently carrying on in the usual way the business of
the partnership.”
PARTNERSHIP
128
Art. 1803
(2) Unanimous consent required for alteration of immovable property. — Under the second paragraph, the unanimous consent of
all the partners is necessary for any important alteration in the
immovable property of the partnership. The consent need not be
express. It may be presumed from the fact of knowledge of the
alteration without interposing any objection.
(a) The prohibition applies only to immovable property
because of the greater importance of this kind of property
as compared to movable property (11 Manresa 391-392.),
and the alteration thereof must be important. Any important
alteration in the immovable property of the partnership is
an act of strict dominion. (see Art. 1818, pars. 2, 3.) Hence,
even the managing partner cannot make such alteration,
notwithstanding that it is useful to the partnership, without
the consent of all the partners.
(b) If the refusal to give consent by the other partners is
manifestly prejudicial to the interest of the partnership, the
intervention by the court may be sought for authority to make
the necessary alteration. Such consent may be presumed from
the silence of the other partners who did not interpose any
opposition to the making of the alteration, notwithstanding
knowledge on their part to the making of the alteration.
(c) The second paragraph speaks of alteration “even
if it may be useful to the partnership.” If the alteration is
necessary for the preservation of the property, it would seem
that the consent of the other partners is not required.
ILLUSTRATIVE CASES:
1. A contract was entered into by a partner without the consent
of the others, there being no agreement with regard to the manner of
management.
Facts: A, B, and C organized a partnership for the purpose
of engaging in the transportation business. Without a previous
express authority, A contracted an indebtedness for automobile
supplies and accessories.
Issue: Are the partnership and the partners liable for said
indebtedness?
Held: Yes. There being no agreement with regard to the
manner of management, all the partners are considered agents
Art. 1804
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
129
of the partnership. A must be deemed to have authority to
contract the indebtedness in question inasmuch as it was
incurred in the prosecution of the partnership business.
(Bachrach vs. “La Protectora,” 37 Phil. 441 [1918].)
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2. A third person seeks enforcement of a contract entered into
by a partner who, under the articles, was not empowered to make the
contract.
Facts: Veterans Army was organized to perpetuate the
spirit of patriotism and fraternity among its members, and to
promote the welfare of each member. It was provided in its
articles that it shall be composed of a department and two or
more posts, with a commander for the department and each
post and that the members of the department shall constitute a
quorum for the transaction of business.
CRM brought an action against Veterans Army to recover
unpaid rent under a contract of lease entered into by it with one
of Veterans Army’s posts, known as Lawton Post.
Issue: Is the contract of lease binding upon Veterans Army?
Held: No. Any partner is empowered to contract in the name
of the partnership only when the articles make no provision
for the management of the partnership business. In this case,
the articles do so provide. They declare what the duties of
the several officers are. The power of making contracts is not
expressly given to any officers. The department could not be
bound unless by resolution adopted at some meeting where
at least six members of the department were present. (Council
of Red Men vs. Veterans Army, 7 Phil. 685 [1907]; see, however,
Litton vs. Hill & Ceron, supra, and Art. 1818.)
ART. 1804. Every partner may associate another person with him in his share, but the associate shall not be
admitted into the partnership without the consent of all
the other partners, even if the partner having an associate should be a manager. (1696)
Contract of subpartnership.
A partner may associate another person with him in his
share without the consent of the other partners. Such associate is
sometimes referred to as a subpartner.
PARTNERSHIP
130
Art. 1804
(1) Nature. — The partnership formed between a member of a
partnership and a third person for a division of the profits coming
to him from the partnership enterprise is termed subpartnership.
How profits between the members of a subpartnership are to be
divided is immaterial, and the mere fact that the one who is not a
partner of the original partnership is to receive the entire profits of
the business will not prevent the formation of a subpartnership.
(59 Am. Jur. 2d 941.)
In effect, a subpartnership is a partnership within a partnership and is distinct and separate from the main or principal partnership.
(2) Right of person associated with partner’s share. — Subpartnership agreements do not in any wise affect the composition,
existence, or operations of the firm. The sub-partners are partners inter se, but, in the absence of the mutual assent of all the
parties, a subpartner does not become a member of the partnership, even though the agreement is known to the other members
of the firm. (68 C.J.S. 460.)
Not being a member of the partnership, he does not acquire
the rights of a partner nor is he liable for its debts.
EXAMPLE:
A, B, and C are partners. A may contract with D, whereby
the latter will participate in his (A’s) share in the profits of the
partnership. This A can do independently of the partnership
and in accordance with the principle of freedom to contract.
The original contract of partnership between A, B, and C is
not in any manner altered. D is considered merely a creditor of
A who associated him in his share. Consequently, D has no right
to intervene in the partnership to which he is a mere stranger.
Like an assignee, D cannot interfere in the management or
administration of the partnership business, require information
or account, or inspect partnership books. (Art. 1813.)
A continues in the enjoyment of the rights and remains
subject to the liabilities of a partner as though no contract has
been made by him with D. (see Machuca vs. Chuidian, 2 Phil.
210 [1903].)
Art. 1805
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
131
D does not become a partner nor is he liable for the
partnership debts even if the agreement between A and D is
with the knowledge and assent of B and C. D is an investor.
(3) Reason for the rule. — In the above example, for D to
become a partner, A, B, and C must consent even if A should be
the manager because a partnership is based on mutual trust and
confidence among the partners. Furthermore, the inclusion of D
as a new partner will in effect be a modification of the original
contract of partnership requiring the unanimous consent of all
the partners. It would seem that the prohibition applies even if
the person associated is already a partner.
ART. 1805. The partnership books shall be kept,
subject to any agreement between the partners, at the
principal place of business of the partnership, and every partner shall at any reasonable hour have access to
and may inspect and copy any of them. (n)
Keeping of partnership books.
(1) Partner with duty to keep partnership books. — The duty to
keep true and correct books showing the firm’s accounts, such
books being at all times open to inspection of all members of the
firm, primarily rests on the managing or active partner. (40 Am.
Jur. 356.) or the particular partner given record-keeping duties.
It is presumed that the partners have knowledge of the contents
of the partnership books and that said books state accurately the
state of accounts, but errors can be corrected. (Crane, op. cit., pp.
356-357.)
(2) Rights with respect to partnership books. — Subject to any
agreement to the contrary, the partnership books should be kept
at the principal place of business as each partner has a right to
free access to them and to inspect or copy any of them at any
reasonable time, even after dissolution. This right is granted to
enable the partners to have true and full information of all things
affecting the partnership. (Art. 1806.)
A partner is a co-owner of the partnership properties (Art.
1811.), which include the books of the partnership, and has a
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PARTNERSHIP
Art. 1806
right to participate equally in the management of its affairs. They
should not, therefore, be in the exclusive custody or control of
any one partner, and should not be removed from the principal
place of business of the partnership without the consent of all the
partners.
The partners inspection rights are not absolute. He can be
restrained from using the information gathered for other than
partnership purpose.
(3) Access to partnership books. — Article 1805 declares that
the rights of the partners with respect to partnership books
can be exercised at “any reasonable hour.” This phrase has
been interpreted to mean reasonable hours on business days
throughout the year and not merely during some arbitrary
period of a few days chosen by the managing partners (Pardo vs.
Lumber Co. and Ferrer, 47 Phil. 964 [1925].), e.g., from December
21 to 31 every year.
ART. 1806. Partners shall render on demand true
and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or of any partner under legal disability.
(n)
Duty to render information.
Under the same principle of mutual trust and confidence
among partners, there must be no concealment between them in
all matters affecting the partnership. Hence, the duty to render
true and full information of all things affecting the same upon
request or demand. The information, to be sure, must be used
only for a partnership purpose.
The use of the words “on demand’’ does not mean that a
partner is under no obligation to make a voluntary disclosure of
information affecting the partnership. Not only is a partner bound
to give information on demand but in certain circumstances, he
is under the duty of voluntary disclosure of material facts (Crane,
op. cit., pp. 359-360.) within his knowledge relating to or affecting
Art. 1807
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
133
partnership affairs. (see Art. 1821.) But the duty to render
information does not arise with respect to matters appearing in
the partnership books since each partner has the right to inspect
the books.
Good faith not only requires that a partner should not make
any false statement but also that he should abstain from any
concealment. (Poss vs. Gottlieb, 193 N.Y.S. 418, 421.)
EXAMPLES:
(1) A and B are partners engaged in the real estate business.
A learned that C was interested in buying a certain parcel of
land owned by the partnership, even for a high price. Without
informing B, A was able to make B sell to him (A) his (B’s) share
in the partnership. Then, A sold the land at a big profit.
In this case, A is liable to B for the latter’s share in the
profits. When A purchased B’s interests, A was under the duty
to make disclosure of facts having a bearing on the value of
such interests which were not known to B.
(2) If A discovered a valuable mine on a land of the
partnership, he is under a duty to disclose such information
before purchasing the interest of B.
ART. 1807. Every partner must account to the partnership for any benefit, and hold as trustee for it any
profits derived by him without the consent of the other
partners from any transaction connected with the formation, conduct, or liquidation of the partnership or
from any use by him of its property. (n)
Partner accountable as fiduciary.
The relation between the partners is essentially fiduciary
involving trust and confidence, each partner being considered
in law, as he is, in fact, the confidential agent of the others. The
duties of a partner are analogous to those of a trustee.
(1) Duty to act for common benefit. — It is, therefore, the
obligation of a partner to act for the common benefit of all in all
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PARTNERSHIP
Art. 1807
transactions8 relating to the partnership business or affairs. He
cannot, at the expense or to the detriment of the other partners,
use or apply exclusively to his own individual benefit partnership
assets or the results of the knowledge and information gained in
the character of partner. (Pang Lim & Galvez vs. Lo Seng, 42 Phil.
283 [1921].)
Managing partners particularly owe a fiduciary duty to
inactive partners.
(2) Duty begins during formation of partnership. — The principle of utmost good faith covers not only dealings and transactions occurring during the partnership but also those taking
place during the negotiations leading to the formation of the
partnership. (Allen vs. Steinberg, 223 A. 2d 240.) Hence, where
one partner procures the other to sign an agreement, which is
manifestly unjust and unfair, the agreement will not be upheld
(see Art. 1838.) if it be made to appear that the injured party’s
signature was obtained by a promise which was never, and could
not be, carried into effect. (George vs. Sohn’s Adm’r., 230 S.W.
904.)
Also, a person who agreed with another to form a partnership
has the obligation to account for commissions and discounts
received in acquiring property for the future partnership.
(3) Duty continues even after dissolution of partnership. — The
duty of a partner to act with utmost good faith towards his copartners continues throughout the entire life of the partnership
even after dissolution for whatever reason or whatever means,
until the relationship is terminated, i.e., the winding up of
partnership affairs is completed. (see Art. 1829.) In dealings
8
The courts have interpreted the word “transaction,” as used in Article 1807, as the
justice of the case demanded rather than by any abstract definition; and have given the
word a broad, comprehensive meaning whenever necessary to meet the intention and
purpose of the law. In its ordinary and popular sense, it has been defined as signifying
“the doing or performing of any affair; that which is done or in the process of being
done,” and again “as a matter or affair completed or in the course of completion.” It is
enough to constitute a given transaction a business transaction, if it carries a reasonable
prospect of future advantage even though the anticipated values may be lost in subsequent negotiations designed to bring it to fruition. This is also true, even though it has
no present market value in the hands of the partnership or cannot be made the basis if a
legal claim against parties outside of the firm. (Chance vs. Carter, 158 P. 947; Fouchek vs.
Janicek, 225 P. 2d. 783.)
Art. 1807
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
135
affecting the winding up of the partnership and the proper
preservation of partnership assets during that time, “the good
faith and full disclosure exacted of partners continues.” (Lavin
vs. Enrlich, 363 N.Y.S. 2d 50; Hamilton Co. vs. Hamilton Tile
Corp., 197 N.Y. 2d 384.)
(4) Duty to account for secret and similar profits. — The duty
of a partner to account as a fiduciary operates to prevent from
making a secret profit out of the operation of the partnership
(Art. 1807.) and from carrying on the business of the partnership
for his private advantage or a business in competition or rivalry
with the business of his firm without the consent of the other
partners. (Art. 1808.) The violation of this duty may be a ground
for a petition for judicial dissolution of the partnership. (See Art.
1831, par. 1[3, 4, 6].)
(5) Duty to account for earnings accruing even after termination of
partnership. — The duty of a former partner to share profits with
his former associates may extend to earnings accruing after the
termination of the partnership. The true rule, according to a case,
is: “when a partner wrongfully snatches a seed of opportunity
from the granary of his firm, he cannot thereafter excuse himself
from sharing with his co-partners the fruits of its planting,
even though the harvest occur after they have terminated the
association.”
Or to put it otherwise: “if a member of a partnership avails
himself of information obtained by him in the course of the
transaction of partnership business which is within the scope of
the firm’s business, and thereafter applies it to his own account
without the consent or knowledge of his co-partners, he is liable
to account to the partnership for any benefit he may obtain from
the use of such information.” (See Am. Jur. 221.)
(6) Duty to make full disclosure of information belonging to
partnership. — A partner is also subject to the fiduciary duty of
undivided loyalty and complete diclosure of information of all
things affecting the partnership. (Art. 1806.)
By information is meant information which can be used for
the purposes of the partnership. Information belongs to the
partnership in the sense of property in which it has a valuable
right, if it is of the character which might be employed to the
PARTNERSHIP
136
Art. 1807
partnership’s advantage. Such information cannot be used by
one partner for his private gain. This is true no matter when
his wrongful enterprise springs into profitable operation, even
though it happens after the termination of the partnership from
whence he obtained it. (Fouchek vs. Janicek, 225 P. 2d 783.)
(7) Duty not to acquire interest or right adverse to partnership.
— A partner may not purchase, for his own benefit, property of
any kind in which the partnership is interested, or lease property
when the firm is entitled to the benefit of such lease, or secure
a valuable contract for himself which it is his duty to secure for
the firm, or obtain secretly any right that should belong to the
partnership, and put it to his own individual profit. If he does,
he holds in trust for the benefit of the partnership the property so
purchased, or leased, or the contract he has obtained, and must
account to the firm for the profits of the transaction, unless it appears that the co-partner consented to the transaction. The same
result will follow any attempt by one partner to appropriate firm
property or funds to his individual benefit (such as payment of
his debts) without the consent of his co-partners. (68 C.J.S. 548549.)
The consent required to be secured from the other partners
must necessarily be an “informed consent” with knowledge of
the facts necessary to the giving of an intelligent consent. (Starr
vs. International Realty Ltd., 533 P. 2d 165.)
EXAMPLE:
A and B are partners engaged in the real estate business.
A bought a parcel of land with partnership funds in his own
name and subsequently sold the same at a profit.
B has a right to share in the profit and A holds as trustee the
profits derived by him from the transaction.
ILLUSTRATIVE CASES:
1. A partner redeemed with his own private funds foreclosed
property of partnership.
Facts: A and B were partners in the operation of a cinema
business. The theatre was mortgaged to C who foreclosed the
Art. 1807
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
mortgaged debt. A, in his own behalf, redeemed the property
with his own private funds.
Subsequently, A filed a petition for the cancellation of the
old title of the partnership and the issuance of another title in
his name alone.
Issue: Did A become the absolute owner of the property?
Held: No. In this case, when A redeemed the property in
question he became a trustee for the benefit of his co-partner, B,
subject to his right to demand from the latter his contribution
to the price of redemption plus legal interest. (Catalan vs.
Gatchalian, 105 Phil. 1270 [1959].)
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________
________
2. A partner, after selling to his co-partner his interest in a
partnership and acquiring from a lessor the plant and land leased by
the partnership, seeks to terminate the lease.
Facts: A and B were partners under the firm name of Lo
Seng & Co. in the business of running a distillery. Upon the
expiration of the original contract of lease of the land on
which said distillery was located as well as the buildings and
improvements thereon which were then the property of X,
a new contract was executed on behalf of the partnership as
lessee by the partners themselves.
Later, A sold all his interest in the distillery plant to B.
Thereafter, X sold all his interest in the distillery including the
land to A.
Upon the refusal of B to yield the property, A brought
action (under Art. 1676 of the Civil Code), the lease not having
been recorded in the Registry of Property.
Issue: Has A the right to terminate the lease?
Held: No. A occupied a double role in the transactions
which gave rise to the litigation: first, as lessee, and secondly, as
a purchaser seeking to terminate the lease. While yet a partner,
A participated in the creation of the lease to the partnership;
and when he sold out his interest in the firm to B, this operated
as transfer to B of his interest in the firm assets, including
the lease; and A cannot now be permitted, in the guise of a
purchaser, to destroy an interest derived from himself and for
which he has received full value.
137
PARTNERSHIP
138
Art. 1807
A acted in bad faith. He had been in relation of confidence
with B and in that position had acquired knowledge of the
possibilities of the property. On account of his status as partner,
A knew that the original lease had been extended and the extent
of the valuable improvements that had been made thereon.
It would be shocking to the moral sense if the condition of
the law were found to be such that A, after profiting from the
sale of his interest in a business, worthless without the lease,
could intervene as purchaser of the property, and confiscate for
his own benefit the property which he had sold for a valuable
consideration to B. Above all other persons in business relations,
partners are required to exhibit towards each other the highest
degree of good faith. (Pang Lim and Galvez vs. Lo Seng, 42 Phil.
282 [1921].)
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________
________
3. Plaintiff seeks accounting of his share in the profits of a
company rehabilitated by defendants after the former defaulted in his
obligation to raise funds for the rehabilitation of said company.
Facts: A, B, C, and D entered into a contract to promote
the rehabilitation of a mining company. The parties agreed to
raise money on the said plan within six months by obtaining
subscriptions to shares of the mining company. It was
expressly stipulated that the failure of one to perform within
the stipulated period would discharge the others. A defaulted
in his part.
Under the contract, B and C were discharged from their obligations. Thereafter, B and C considered themselves released
from the said contract, and presented a new plan for the rehabilitation of the company. The new plan was adopted and B
and C succeeded in raising the price of the stock of the company and made large profits.
A brought action to compel B and C to account for his share
in the profits which he claimed B and C obtained by virtue of
their contract.
Issue: Are B and C accountable to A as a fiduciary for the
profits?
Held: No. After the termination of an agency, partnership,
or joint adventure, the party who stood in a fiduciary relation
to another is free to act in his own interest with respect to the
Art. 1807
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
same subject matter provided he has done nothing during the
continuance of the relation to lay a foundation for an undue
advantage to himself. To act as fiduciary of another does not
necessarily imply the creation of a permanent disability in the
fiduciary to act for himself in regard to the same subject matter.
(Hanlon vs. Hausserman and Beam, 40 Phil. 796 [1920].)
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4. Widow of deceased partner seeks accounting from surviving
partners who acquired with partnership assets, properties long
after the dissolution of the partnership as a result of the death of the
deceased partner who was in control of partnership affairs during his
lifetime.
Facts: A, widow of B, a deceased partner, filed an action for
accounting against C and D, surviving partners, alleging that
during the lifetime of B, C and D managed to use huge amounts
of the funds and assets of the partnership for personal purposes
and, after the death of B, they, without liquidation continued
the partnership by purportedly organizing a corporation and
acquired lands using the money and assets of the partnership.
It appears that B was in control of the affairs and the running
of the partnership and the lands in question were acquired by
C and D long after the partnership had been automatically
dissolved as a result of the death of B.
Issue: Is A entitled to an accounting?
Held: No. Article 1807 is not applicable. Since B was in
control of the affairs of the partnership, it is hard to believe
that C and D could have defrauded B of the amounts A claims.
The more logical inference is that if C and D had obtained any
portion of the funds of the partnership for themselves, it must
have been with the knowledge and consent of B, for which
reason no accounting could be demanded from them therefor,
considering that Article 1807 refers only to what is taken by a
partner without the consent of the other partner or partners.
Since the properties supposed to have been acquired by C
and D with partnership funds appear to have been transferred
to their names long after the dissolution of the partnership,
C and D have no obligation to account to anyone for such
acquisitions in the absence of clear proof that they had violated
the trust of B, the deceased partner, during the existence of the
partnership. (Lim Tanhu vs. Ramolete, 66 SCRA 425 [1975].)
139
PARTNERSHIP
140
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Art. 1807
________
5. Plaintiff seeks his share of option money paid to partnership
and forfeited for failure of optioner to exercise privilege to buy shares
in the corporation which substituted the partnership.
Facts: A, B, C, D, E, and F were partners operating a bus
line under the name of “Western Kentucky Stages.” B and C,
after negotiations, entered into an agreement with Greyhound,
Inc., by the terms of which Greyhound, Inc., agreed to pay
$27,500.00 for an option to buy 60% of Western’s stock in the
event Western would alter its status from a partnership to that
of a corporation. The reason offered for this change, among
other things, was that they desired to be relieved of the personal
liability imposed by the partnership set-up.
F opposed substituting the partnership for a corporation
for some time but he finally yielded to the plan.
After the partnership became a corporation, the option
money was forfeited by the refusal of Greyhound, Inc. to
complete its deal. The $37,500.00 was divided among A, B, C,
D, and E. F, then, instituted action, claiming his share of the
$37,500.00.
Issue: Are A, B, C, D, and E duty-bound to account to, and
share the $37,500.00 with A?
Held: Yes. There is no relation of trust or confidence known
to the law that requires of the parties a higher degree of good
faith than that of partnership. Nothing less than absolute
fairness will suffice. Each partner is the confidential agent
of all the other and each has the right to know all that the
others know. Nor will one partner be permitted to benefit at
the expense of the firm. A, B, C, D, and E were under a legal
obligation as partners to share proportionately with F the
option money which was obtained by the optioners by virtue
of the partnership relationship.
The important factor is that they received money which
should have gone into the partnership treasury and then
should be divided proportionately among all of the partners.
When they received the money under the conditions recited,
they became, in effect, trustees of this fund for the benefit of F
for his share in the proceeds. (Van Hooser vs. Keenon, 271 S.W. 2d
270 [Ky., 1954].)
Art. 1808
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
141
ART. 1808. The capitalist partners cannot engage for
their own account in any operation which is of the kind
of business in which the partnership is engaged, unless
there is a stipulation to the contrary.
Any capitalist partner violating this prohibition
shall bring to the common funds any profits accruing to
him from his transactions, and shall personally bear all
the losses. (n)
Prohibition against partner engaging
in business.
(1) Prohibition relative. — The prohibition against the
capitalist partner to engage in business is relative, unlike the
industrial partner who is absolutely prohibited from engaging in
any business for himself. (Art. 1789.)
(a) The capitalist partner is only prohibited from engaging for his own account in any operation which is the same as
or similar to the business in which the partnership is engaged
and which is competitive with said business. Any capitalist
partner violating this prohibition shall be under obligation to
bring to the common fund any profits derived by him from
his transactions and, in case of losses, he shall bear them
alone. The partners, however, by stipulation may permit the
capitalist partner to engage in the same kind of business.
(b) The law does not prohibit a partner from engaging
in enterprises in his own behalf during the period that
he is a member of a firm but permits him to carry on a
business activity not connected or competing with that of
the partnership, so long as the partnership agreement does
not prohibit such activity. Any other rule, it is said, would
prevent a member of a partnership from investing his private
funds. (see 40 Am. Jur. 220.)
(c) The law is silent on whether a capitalist partner can
engage in the same line of business for the account of another.
It would seem that the prohibition still applies. A partner
occupies a fiduciary position with respect to his co-partners
imposing duties of utmost good faith, and he may not carry
142
PARTNERSHIP
Art. 1809
on any other business in rivalry with the business of the
partnership whether in his own name or for the account of
another at the expense of the partnership.
(2) Reason for the prohibition. — It is universal that a capitalist
partner, without the consent of his co-partners, cannot carry on a
business of the same nature and in competition with that of the
firm. Since the relationship of partners is fiduciary and imposes
upon them the obligation of the utmost good faith in their
dealings with one another with respect to partnership affairs,
one partner will not be permitted to retain for himself alone as
against his co-partners benefits from the partnership relation.
The rule prevents a partner from availing himself personally
of information obtained by him in the course of the transaction of
the partnership business or by reason of his connection with the
firm regarding the business secrets and clientele of the firm to its
prejudice. (see Ibid., 220-221.)
ART. 1809. Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession of its property by his copartners;
(2) If the right exists under the terms of any agreement;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it just and
reasonable. (n)
Right of partner to a formal account.
(1) General rule. — In general, during the existence of the
partnership, a partner is not entitled to a formal account of
partnership affairs. The reason is that the rights of the partner
to know partnership affairs are amply protected in Articles
1805 and 1806. Furthermore, to entitle any partner to the right
to constantly demand or ask for a formal accounting will cause
much inconvenience and unnecessary waste of time. Thus, a suit
Art. 1809
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
143
for accounting usually is filed only when the partnership has
been dissolved. A formal account is a necessary incident to the
dissolution of the partnership.
(2) Exceptions. — However, in the special and unusual
situations enumerated under Article 1809, the justification for
a formal accounting even before dissolution of the partnership
cannot be doubted. An example under No. (4) of Article 1809
is where a partner has been assigned abroad for a long period
of time in connection with the partnership business and the
partnership books during such period being in the possession of
the other partners.
The right of a partner to demand an accounting without
bringing about or seeking a dissolution is a necessary corollary
to his right to share in the profits.
(3) Prescriptive period. — The obligation to account is one
which rests especially on the shoulders of a managing or active
partner, and is one of the special tasks of a liquidating or surviving
partner. (40 Am. Jur. 333.) Articles 1806, 1807, and 1809 show that
the right to demand accounting exists as long as the partnership
lasts. Prescription begins to run only upon the dissolution of the
partnership when the final accounting is done. (Fue Leung vs.
Intermediate Appellate Court, 169 SCRA 746 [1989]; Emnace vs.
Court of Appeals, 370 SCRA 431 [2001].)
(4) Nature of action for accounting. — An action for accounting,
asking that the assets of the partnership be accounted for, sold
and distributed according to the agreement of the partners
is a personal action which under the Rules of Court, may be
commenced and tried where the defendent resides or may be
found or where the plaintiffs reside, at the election of the latter.
The fact that the some of the assets of the partnership are real
property does not materially change the nature of the action. It
is an action in personam because it is an action against a person
for the performance of a personal duty on his part, and not an
action in rem where the action is against the thing itself. It is
only incidental that part of the assets of the partnership subject
to accounting or under liquidation happen to be real property.
(Emnace vs. Court of Appeal, supra.)
PARTNERSHIP
144
Art. 1809
ILLUSTRATIVE CASES:
1. A partner seeks to recover 1/2 of the proceeds of a partnership
transaction without liquidation of the business.
Facts: A seeks to recover from B 1/2 of the purchase price of
lumber sold by the partnership to the United States Army. A’s
complaint does not show why he should be entitled to the sum
he claims. It does not allege that there has been a liquidation of
the partnership business and the said sum has been found to be
due him as his share of the profits.
Issue: Should the proceeds from the sale of the lumber be
considered profits?
Held: They cannot be considered profits until costs and
expenses have been deducted. Moreover, the profits of a
business cannot be determined by taking into account the result
of one particular transaction instead of all the transactions had.
Hence, the need for a general liquidation before a member of a
partnership may claim a specific sum as his share of the profits.
(Sison vs. H. McQuaid, 94 Phil. 201 [1953].)
________
________
________
2. Right of a partner who received his capital contribution to
demand accounting from managing partners.
Facts: A and B entered into a verbal contract of partnership.
In view of their failure to agree upon the partnership articles, A
returned to B the money contributed by the latter to the capital
of the partnership.
Issue: Did the return to B of the money effect a waiver by
him of his right to an accounting of the profits already realized
by the partnership as well as a termination of the partnership?
Held: No. There was no intention on the part of B to
relinquish his rights as a partner nor did he give any ground
whatever to make A believe that he intended to relinquish them.
On the contrary, B notified A when he accepted the money that
he waived none of his rights in the partnership.
Furthermore, the money fell short of the capital contributed by B and it was possible that profits might have been
realized from the business during the period in which A was
administering it and if so, still retained in A’s hands. For these
reasons, the acceptance of the money was not in itself inconsistent with the continuance of the partnership relations, as
Art. 1809
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
would have been the case had B withdrawn his entire interest
in the partnership.
There was, therefore, nothing upon which a waiver, express
or implied, could be predicated. (Fernandez vs. De la Rosa, 1 Phil.
671 [1902].)
________
________
________
3. In questioning the accuracy of the account made, a partner
merely made a general allegation of the probability of mistake.
Facts: By mutual agreement, A and B dissolved their
partnership. A brought action to recover from B who had been
left in charge of the books and the funds of the firm, the amount
of the capital he had contributed. While B was more especially
burdened with the care of the books of the partnership, they
were at all times opened to the inspection of A.
B claimed losses in the conduct of the business. A contended
himself with a general allegation to the effect that there must be
some mistake as to accuracy of the account, as he did not and
could not believe that the business had been conducted at a
loss.
Issue: What is the effect of A’s failure to point out specifically
any fraudulent or erroneous items appearing in the account?
Held: Such failure should be construed as a strong
circumstance indicating the accuracy of the account. (Garrido
vs. Ascencio, 10 Phil. 691 [1908].)
________
________
________
4. Without objecting to a statement of accounts, a partner
promised to sign the same after receiving his shares, and after he has
been paid, refused to sign and instead demanded a liquidation.
Facts: A submitted a statement of accounts to B, his copartner. Instead of objecting to said statement, B promised
to sign the same as soon as he received his shares as shown
in said statement. After said shares had been paid by A and
accepted by B without reservation, the latter refused to sign
the statement. B demanded a new liquidation, claiming that
he was entitled to more than what the statement of account
shows.
Issue: Is B entitled to a further liquidation?
Held: No. After accepting his shares without any reservation,
B virtually confirmed his approval of the statement of accounts,
145
Art. 1809
PARTNERSHIP
146
and its signing thereby became a mere formality to be complied
with by B exclusively. His refusal to sign, after receiving the
shares, amounted to a waiver of that formality in favor of A who
had already performed his obligation. This approval precludes
any right on the part of B to a further liquidation, unless he can
show there was fraud or mistake in said approval. (Ornum vs.
Lasala, 74 Phil. 241 [1943].)
________
________
________
5. Plaintiff was excluded as industrial partner after she filed
a complaint for formal accounting, the defendants having always
known her government position and other work when she joined the
partnership.
Facts: The articles of a partnership were amended to include
A, as an industrial partner, with B, C, and D, the original
capitalist partners. The amended articles provided that “the
contribution of A consists of her industry being an industrial
partner” and that she shall be entitled to 30% of the net profits
that may be realized by the partnership from June 7, 1955 until
the mortgage loan obtained from the Rehabilitation Finance
Corporation shall have been fully paid.
After nine (9) years, B, C, and D reached an agreement
whereby A has been excluded from the partnership, and
deprived of her alleged share as an alleged industrial partner
on the ground that she had never contributed her industry to
the partnership and instead she has been and still is a judge of
the City Court of Manila devoting her time to the performance
of her duties as such judge and enjoying the privileges and
emoluments appertaining to said office, aside from teaching in
law schools in Manila, without the express consent of the other
partners.
Issue: Has A the right to demand for a formal accounting?
Held: Yes. A has faithfully complied with her prestation
with respect to the other partners. This is clearly shown by the
fact that it was only after the filing of the complaint by A and
the answer thereto that appellants (B, C, and D) exercised their
right to exclusion by alleging in their supplemental answer
dated July 29, 1964 — or after around nine (9) years from June
7, 1955 — the agreement aforementioned.
Having always known A as a City Judge even before
she joined the appellant company as an industrial partner, it
Art. 1809
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners Among Themselves
took the appellants so many years before excluding her from
said company. There was no pretense even on the part of the
appellants that A engaged in any business antagonistic to that
of appellant company. Furthermore, the theory that A has
never been an industrial partner cannot be reconciled with the
agreement evidenced by the amended articles of partnership.
As an industrial partner, A has the right under Article 1809
for a formal accounting and to receive her share in the net profit
that may result from such an accounting. (Evangelista & Co. vs.
Abad Santos, 51 SCRA 416 [1973].)
— oOo —
147
148
PARTNERSHIP
SECTION 2. — Property Rights of a Partner.
ART. 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management. (n)
Extent of property rights of a partner.
(1) Principal rights. — The property rights of a partner
enumerated under Article 1810 are as follows:
(a) His rights in specific partnership property (Art. 1811.);
(b) His interest in the partnership (Art. 1812.); and
(c) His right to participate in the management. (Art.
1803.)
(2) Related rights. — A partner has other rights which are
related to the above, namely:
(a) the right to reimbursement for amounts advanced
to the partnership and to indemnification for risks in
consequence of management (Art. 1796.);
(b) the right of access and inspection of partnership
books (Art. 1805.);
(c) the right to true and full information of all things
affecting the partnership (Art. 1806.);
(d) the right to a formal account of partnership affairs
under certain circumstances (Art. 1809.); and
(e) the right to have the partnership dissolved also under
certain conditions. (Arts. 1830-1831.)
148
Art. 1810
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
149
Partnership property and partnership
capital distinguished.
The distinctions are:
(1) Changes in value. — Partnership property is variable — its
value may vary from day to day with changes in the market value
of the partnership assets, while partnership capital is constant
— it remains unchanged as the amount fixed by agreement of
the partners, and is not affected by fluctuations in the value of
partnership property, although it may be increased or diminished
by unanimous consent of the partners;1 and
(2) Assets included. — Partnership property includes not only
the original capital contributions of the partners, but all property
subsequently acquired on account of the partnership, or in the
partnership name with partnership funds, unless a contrary
intention is shown, including partnership name and the goodwill
of the partnership, while partnership capital represents the
aggregate of the individual contributions made by the partners
(see Babb & Martin, op. cit., p. 240.) in establishing or continuing
the partnership.
Ownership of certain property.
(1) Property used by the partnership. — Where there is no express agreement that property used by a partnership constitutes
partnership property, such use does not make it partnership
property, and whether it is so or not depends on the intention of
the parties, which may be shown by proving an express agreement or acts of particular conduct. (Teller, op. cit., p. 45, citing
Blakeslee vs. Blakeslee, 265 Ill. 48.)
It is not unusual for an individual partner to allow his property to be used in the partnership business, without intending to
transfer ownership of it. A partner may contribute to the partnership only the use or enjoyment of property, reserving the ownership thereof (Art. 1830[4].); or he may allow the partnership to
1
As an amount it remains unchanged, but as an asset, its value is affected by the
changing fortunes of the partnership business.
150
PARTNERSHIP
Art. 1811
use his separate property without having it become part of partnership property. Also, he may hold title to partnership property
in his own name without having it belong to him. (see Art. 1819.)
To solve the confusion that may arise, the intent of the
parties — whether the property in question shall belong to the
partnership or themselves — is the controlling factor.
(2) Property acquired by a partner with partnership funds. —
Unless a contrary intention appears, property acquired by a
partner in his own name with partnership funds is presumed
to be partnership property. The presumption created by the use
of such funds can be overcome only by a great deal of contrary
evidence. But if the property was acquired after dissolution but
before the winding up of the partnership affairs, it would be
his separate property but he would be liable to account to the
partnership for the funds used in its acquisition.
(3) Property carried in partnership books as partnership asset.
— This fact creates a very strong inference that it is partnership
properly. The inference is stronger if the records carry as a
partnership liability an unpaid balance on the property.
(4) Other factors tending to indicate property ownership. — The
fact that the income generated by the property is received by the
partnership or the taxes thereon are paid by the partnership is
evidence that the partnership is the owner. But the sole fact that
partnership funds were later used to repair or maintain property
purchased with funds of an individual partner is not sufficient as
basis to show that the property now belongs to the partnership.
ART. 1811. A partner is co-owner with his partners
of specific partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and to any agreement between the partners, has an
equal right with his partners to possess specific partnership property for partnership purposes; but he has
no right to possess such property for any other purpose
without the consent of his partners;
Art. 1811
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
151
(2) A partner’s right in specific partnership property
is not assignable except in connection with the assignment of rights of all the partners in the same property;
(3) A partner’s right in specific partnership property
is not subject to attachment or execution, except on
a claim against the partnership. When partnership
property is attached for a partnership debt the partners,
or any of them, or the representatives of a deceased
partner, cannot claim any right under the homestead or
exemption laws;
(4) A partner’s right in specific partnership property is not subject to legal support under article 291. (n)
Nature of a partner’s right in specific
partnership property.
A partner, as such, does not actually own any part of
partnership property or property owned by the partnership as a
separate business entity, although he does have rights in specific
partnership assets.
Article 1811 contemplates tangible property, such as a car,
truck, or a piece of land, but not intangible thing such as the
beneficial right to a land of the public domain like a fishpond. A
fishpond of the public domain can never be considered a specific
partnership property because only its use and enjoyment, never
its title or ownership, is granted to specific private persons.
(Deluao vs. Casteel, 29 SCRA 250 [1969].)
A partner is a co-owner with his partners of specific partnership property,2 but the rules on co-ownership do not necessarily
apply. The legal incidents of this tenancy in partnership are dis-
2
This statement in Article 1811 is not accurate because specific partnership property
is owned not by the partners in common but by the partnership as a juridical person. In
contemplation of law, a partnership is a distinct and separate entity from the partners
who compose it. (see Art. 1768.) The Uniform Partnership Act regards a partnership as an
“association” (see Art. 1767.) and not as a legal entity; hence, it cannot hold title to partnership property in its name. However, the incidents of the co-ownership enumerated are
consistent with the legal entity theory of a partnership.
152
PARTNERSHIP
Art. 1811
tinctively characteristic of the partnership relation. They are as
follows:
(1) Equal right of possession for partnership purposes. — Ordinarily, a partner has an equal right to possess specific partnership property for partnership purposes. None of the partners can
possess and use the specific partnership property other than for
“partnership purposes” (e.g., for his own individual purpose)
without the consent of the other partners.
(a) Should any of them use the property for his own
profit or benefit to the exclusion of his partner or partners, he
must account, like any stranger, to the others for the profits
derived therefrom (see Arts. 1807, 1788, par. 2.) or the value
of his wrongful possession or occupation. A partner who
is wrongfully excluded from the possession of partnership
property by his co-partner has a right to formal account from
the latter (Art. 1809[1].), and even apply to a judicial decree
of dissolution. (see Art. 1831[3, 4, 6].)
(b) On the death of a partner, his right in specific partnership property vests in the surviving partners, not in the legal
representative of the deceased partner (except when he was
the last surviving partner). That is to say, the surviving partners have the right to wind up the business, and the executor of a deceased partner cannot insist on participating in the
winding up process. (Babb & Martin, op. cit., p. 243; see Art.
1842.)
(c) By agreement, the right to possess specific partnership
property may be surrendered, and this is especially true of a
partnership with large membership, where the management
and possession are concentrated in the managing partners.
(Crane, op. cit., p. 200.) It is not beyond the scope of partnership
articles to provide for the vesting of exclusive control in
one partner. In the absence of special agreement, however,
neither partner separately owns, or has the exclusive right of
possession of, any particular partnership property; nor does
he own any proportional part of any particular partnership
property, but each has dominion over such property and over
the entire partnership property. (40 Am. Jur. 210.)
Art. 1811
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
153
(d) The possession of partnership property by one partner
is the possession of all partners until his possession becomes
adverse. A partner cannot initiate title to property by adverse
possession as against his co-partner, until and unless he
makes an adverse claim of title under such circumstances as
will charge his co-partner with notice of the adverse claim.
(68 C.J.S. 527-528.)
(2) Right not assignable. — A partner cannot separately assign
his right to specific partnership property but all of them can
assign their rights in the same property.
(a) A partner’s right in specific partnership property
is not assignable because it is impossible to determine the
extent of his beneficial interest in the property until after
the liquidation of partnership affairs. As property of the
partnership, the same could not be disposed of or mortgaged
even by the partner who contributed the same without
the consent or approval of the partnership or of the other
partners. (Clemente vs. Galvan, 67 Phil. 565 [1939]; Lozana
vs. Depakakibo, 107 Phil. 728 [1960].)
(b) The consent of all the partners, either express or
implied, is the source and limit of a partner’s right to deal
with partnership property for any but a partnership purpose.
(c) The primary reasons for the non-assignability of a
partner’s right in specific partnership property are that it
prevents interference by outsiders in partnership affairs; it
protects the right of other partners and partnership creditors
to have partnership assets applied to firm debts; and it is
often impossible to measure or value a partner’s beneficial
interest in a particular partnership asset. (In re Decker, 295
F. Supp. 501 [1909]; Goldberg vs. Goldbeck, 375 Pa. 78;
Commissioners’ Note, 7 ULA, Partnership, p. 146 [1949].)
(d) Why it is often impossible to determine a partner’s
beneficial interest in a specific partnership property has been
explained as follows:
x x x. In a sense, each partner, having thus a beneficial
interest in the partnership property considered as a
whole, has a beneficial interest in each part, and such
154
PARTNERSHIP
Art. 1811
beneficial interest might be regarded as assignable if it
were not impossible, except by purely arbitrary and
artificial rules, to measure partner’s beneficial interest
in a specific chattel belonging to the partnership, or any
other specific portion of partnership property.
A single illustration will make clear the impossibility
of determining a partner’s beneficial interest in any single
piece of partnership property.
Let us suppose A and B are partners. The value of
partnership property is $100,000; the liabilities amount to
$50,000. A has contributed $15,000 and has a three-fourths
interest in the profits; B has $10,000 and one-fourth interest
in the profits. A attempts to assign his interest in certain
definite chattels belonging to the partnership, the value of
these chattels being $5,000. The chattels themselves must
be still used for partnership purposes. On dissolution, if
still part of the partnership property, they must be sold. If
A conveyed anything, it was not a right in these chattels,
but in a fractional part of his interest in the partnership.
But how is it to be determined of what fractional part
of his interest in the partnership A intended to assign?
Did he intend to give B a lien for $5,000 on his interest; or
a lien on his interest for three-fourths — his share of the
profits — $5,000? Or did he intend to give him a lien on
his interest in the partnership which in amount should
bear the same proportion to the total value of the chattel,
$5,000 as the amount which he would receive should the
partnership be liquidated, bears to the total of the present
partnership property?
It is impossible to answer these questions. If
the assigning partner did not intend to dissolve the
partnership it is even impossible to analyze the possible
intentions. Of course, in practice, a partner who assigns
his “interest in particular partnership chattels’’ has only
the vaguest notion of what he intends. (Commissioners’
Note, 7 U.L.A. 146 [1949].)
(e) Where, however, none of the above reasons apply, an
authorized assignment by a partner of his right in specific
Art. 1811
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
155
partnership property is void, but it may be regarded as a valid
assignment of the partner’s interest in the partnership. The
rationale of this rule is stated thus: “Where an assignment is
not clearly intended to convey a partner’s interest in specific
partnership property, that is, his right to use partnership
property for partnership purposes, but is intended to
convey some interest in partnership property, the fact that
the parties did not couch their assignment in proper terms
does not justify a court holding their transaction void when
there exists evidence establishing a basis upon which the
transaction can be consistent and valid.’’ (In re Decker, 295 F.
Supp. 50; Shapiro vs. United States, 83 F. Supp. 375.)
The law allows a retiring partner to assign his rights in
partnership property to the partner or partners continuing the
business. (see Art. 1840[1, 2].)
(3) Right limited to share of what remains after partnership debts
have been paid. — Strictly speaking, no particular partnership
property or any specific or an aliquot part thereof can be
considered the separate or individual property of any partner.
The whole of partnership property belongs to the partnership
considered as a juridical person (Art. 1768.), and a partner has no
interest in it but his share of what remains after all partnership
debts are paid. (Art. 1812.)
(a) Consequently, specific partnership property is not
subject to attachment, execution, garnishment, or injunction,
without the consent of all partners except on a claim against
the partnership. “If a partner’s right in specific partnership
property is not assignable by voluntary assignment for
a separate purpose of the assigning partner, his separate
creditors should not be able to force an involuntary
assignment. The beneficial rights of the separate creditors of
a partner in partnership property should be no greater than
the beneficial right of their debtor.” (Commissioners’ Note, 7
U.L.A., p. 150 [1949].)
(b) For the same reason that the property belongs to
the partnership, the partners cannot claim any right under
the homestead or exemption laws when it is attached for
156
PARTNERSHIP
Art. 1812
partnership debts. A contrary rule would, in effect, allow
the use of partnership property for other than partnership
purposes and result in the diminution, as far as partnership
creditors are concerned, of partnership property to the extent
of the exemption granted. But a partner’s interest in the
partnership itself may be levied upon by a judgment creditor
because it is actually his property, by means of a “charging
order.” (Art. 1814.)
(c) The right of the partners to specific partnership
property is not subject to legal support under Article 1953
of the Family Code. The reason is also because the property
belongs to the partnership and not to the partners. But their
interest in the partnership (Art. 1812.) is, of course, subject to
legal support. (Art. 1814.)
(d) The method of reaching a judgment debtor’s interest
in partnership property is specifically set forth in Article
1814.
It is clear from the above that although separate creditors
of an individual partner may reach the interest of a partner
in the partnership, they cannot go after any specific partner
property.
ART. 1812. A partner’s interest in the partnership is
his share of the profits and surplus. (n)
Nature of partner’s interest
in the partnership.
A partner’s right in specific partnership property belonging
to the firm to be used for business purposes (supra.) is to be
3
“Art. 195. Subject to the provisions of the succeeding articles, the following are
obliged to support each other to the whole extent set forth in the preceding article:
(1) The spouses;
(2) Legitimate ascendants and descendants;
(3) Parents and their legitimate children and the legitimate and illegitimate children of the latter;
(4) Parents and their illegitimate children and the legitimate and illegitimate children of the latter; and
(5) Legitimate brothers and sisters, whether of full or half-blood. (291a)”
Art. 1812
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
157
distinguished from a partner’s right to share in the firm’s earned
profits.
(1) Share of the profits and surplus. — The partner’s interest
in the partnership consists of his proportionale share in the
undistributed profits during the life of the partnership as a
going concern and his share in the undistributed surplus after its
dissolution.
(a) Profit means the excess of returns over expenditure in
a transaction or series of transactions; or the net income of the
partnership for a given period of time. (see Webster’s 3rd Int.
Dict., p. 1811.)
(b) Surplus refers to the assets of the partnership after
partnership debts and liabilities are paid and settled and
the rights of the partners among themselves are adjusted.
(see Art. 1839.) It is the excess of assets over liabilities. If the
liabilities are more than the assets, the difference represents
the extent of the loss.
(2) Extent of the partner’s interest. — Nothing is to be considered
as the share of a partner but his proportion of the residue or
balance after an account has been taken of the debts and credits,
including the amount paid by the several partners in liquidating
firm debts or in making advances to the partnership, and until
that occurs, it is impossible to determine the extent of his interest.
This interest in the surplus alone which remains after the firm’s
debts have been paid and the equities between the partner and
his co-partners have been adjusted and the partner’s share has
been ascertained and set apart, is available for the satisfaction of
the separate debts of the partners. (Art. 1814; 40 Am. Jur. 209-210;
Fish vs. Wood, 158 S.W. 267.)
(3) Partner’s interest not a debt due from partnership. — A
partner is not a creditor of the partnership for the amount of
his share. (The Leyte-Samar Sales and K. Tomassi vs. S. Cea and
O. Castrilla, 93 Phil. 100 [1953].) The interest of a partner in a
going partnership business where there has been no settlement
of his account is not a debt due to the partner by partnership and,
therefore, is not subject to attachment or execution on a judgment
recovered against the individual partner. (Northampton Brewery
vs. Lande, 2A. 2d 553.)
158
PARTNERSHIP
Art. 1813
ART. 1813. A conveyance by a partner of his whole
interest in the partnership does not of itself dissolve
the partnership, or, against the other partners in the
absence of agreement, entitle the assignee, during the
continuance of the partnership, to interfere in the management or administration of the partnership business
or affairs, or to require any information or account of
partnership transactions, or to inspect the partnership
books; but it merely entitles the assignee to receive in
accordance with his contract the profits to which the assigning partner would otherwise be entitled. However,
in case of fraud in the management of the partnership,
the assignee may avail himself of the usual remedies.
In case of a dissolution of the partnership, the assignee is entitled to receive his assignor’s interest and
may require an account from the date only of the last
account agreed to by all the partners. (n)
Effect of assignment of partner’s whole
interest in partnership.
A partner’s right in specific partnership property is not assignable (Art. 1811[2].) but he may assign his interest in the partnership (Art. 1812.) to any of his co-partners or to a third person
without the consent of the other partners, in the absence of agreement to the contrary.
(1) Rights withheld from assignee. — This article permits the
conveyance by a partner of his whole interest in the partnership
(e.g., sale, donation, as collateral security for a loan) without
causing dissolution. However, such assignment does not grant
the assignee the right:
(a) To interfere in the management;
(b) To require any information or account; or
(c) To inspect any of the partnership books.
(2) Status and rights of assignor as partner unaffected. — The
legal effect of such a conveyance is the same as that of a partner
associating another in his share or interest. (Art. 1804.) Partnership
Art. 1813
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
159
is a relation in which delectus personae is an important element.
No one may be introduced into the firm as a partner without the
unanimous consent of the other partners. The assignment does
not divest the assignor of his status and rights as a partner nor
operate as a dissolution of the partnership. The law, however,
provides the non-assigning partners with a ground for dissolving
the partnership if they so desire. (Art. 1830[1, c].)
Remedy of other partners.
At common law, the mere assignment of a partner’s interest
dissolved the partnership because it was conceived to give rise
to a situation incompatible with the prosecution of a partnership.
The law has been changed under the Uniform Partnership Act
from which Article 1813 was taken.
(1) Dissolution of partnership not intended. — The new rule is
preferable for many partnership assignments are made merely
as security for loans, the assigning partner never intending to
destroy the partnership relation. Moreover, if the assigning
partner neglects his partnership duties after assignment, the
other partners may dissolve the partnership under Article 1830(1,
c) which provides that “Dissolution is caused . . . by the express
will of all the partners who have not assigned their interests,
or suffered them to be charged for their separate debts, either
before or after the termination of any specified term or particular
undertaking.” (Teller, op. cit., p. 53.)
(2) Dissolution of partnership intended. — A partner’s conveyance of his interest in the partnership operates as a dissolution of
the partnership only when it is clear that the parties contemplated and intended the entire withdrawal from the partnership of
such partner and the termination of the partnership as between
the partners. (Johnson vs. Munsell, 104 N.W. 2d 314.)
Rights of assignee of partner’s interest.
The only rights of the transferee or assignee are as follows:
(1) To receive in accordance with his contract the profits
accruing to the assigning partner (see Machuca vs. Chuidian, 2
Phil. 210 [1903].);
PARTNERSHIP
160
Art. 1814
(2) To avail himself of the usual remedies provided by law in
the event of fraud in the management;
(3) To receive the assignor’s interest in case of dissolution;
and
(4) To require an account of partnership affairs, but only in
case the partnership is dissolved, and such account shall cover
the period from the date only of the last account agreed to by all
the partners.
The mere act of assignment with nothing more, does not
bring about the dissolution of the partnership. The purchaser of
a partner’s interest under Articles 1813 or 1814 may, however,
apply to the court for the dissolution of the partnership, after the
termination of the specified term or undertaking or at any time if
the partnership is one at will. (Art. 1831, par. 2.)
EXAMPLE:
A, a partner, mortgaged his interest in partnership X then
worth P500,000.00 to B, a bank, for P300,000.00. Subsequently,
the partnership suffered losses, wiping out A’s interest.
In this case, B has no legal claim against the partnership
to the extent of P300,000.00. Under Article 1813, the mortgage
merely entitles it to receive in accordance with its contract the
profits to which A would otherwise be entitled.
ART. 1814. Without prejudice to the preferred
rights of partnership creditors under article 1827, on
due application to a competent court by any judgment
creditor of a partner, the court which entered the
judgment, or any other court, may charge the interest
of the debtor partner with payment of the unsatisfied
amount of such judgment debt with interest thereon;
and may then or later appoint a receiver of his share
of the profits, and of any other money due or to fall
due to him in respect of the partnership, and make
all other orders, directions, accounts and inquiries
which the debtor partner might have made, or which
circumstances of the case may require.
Art. 1814
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
161
The interest charged may be redeemed at any time
before foreclosure, or in case of a sale being directed by
the court, may be purchased without thereby causing a
dissolution:
(1) With separate property, by any one or more of
the partners; or
(2) With partnership property, by any one or more
of the partners with the consent of all the partners
whose interests are not so charged or sold.
Nothing in this Title shall be held to deprive a partner of his right, if any, under the exemption laws, as
regards his interest in the partnership. (n)
Remedies of separate judgment creditor
of a partner.
(1) Application for a “charging order” after securing judgment on
his credit. — While a separate creditor of a partner cannot attach
or levy upon specific partnership property for the satisfaction
of his credit (Art. 1811[3].) because partnership assets are
reserved for partnership creditors (Art. 1827.), he can secure a
judgment on his credit and then apply to the proper court for a
“charging order,” subjecting the interest of the debtor partner in
the partnership (Art. 1812.) with the payment of the unsatisfied
amount of such judgment with interest thereon with the least
interference with the partnership business and the rights of the
other partners. By virtue of the charging order, any amount or
portion thereof which the partnership would otherwise pay
to the debtor-partner should instead be given to the judgment
creditor.
This remedy is, however, without prejudice to the preferred
rights of partnership creditors under Article 1827. It means that
the claims of partnership creditors must be satisfied first before
the separate creditors of the partners can be paid out of the
interest charged. (See Art. 1839[8].)
(2) Availability of other remedies. — In providing for the
charging order above described, Article 1814 seems to have made
PARTNERSHIP
162
Art. 1814
this an exclusive remedy so that a writ of execution will not be
proper. (Teller, op. cit., pp. 55-57.) The court may resort to other
courses of action provided in Article 1814 (i.e., appointment of
receiver, sale of the interest, etc.) if the judgment debt remains
unsatisfied, notwithstanding the issuance of the charging order.
A similar procedure is established by Article 1862 as to
private creditors of a limited partner.
EXAMPLE:
T recovers a judgment against A, a member of partnership
X composed of A and B, on A’s individual liability.
May T attach any portion of the partnership property or
execute against the same?
No. T’s remedy is to apply for a charging order against the
partnership. No specific property is attached. The partnership
continues and T’s judgment is satisfied out of partnership
assets. The partnership need not be necessarily dissolved.
(Ibid., p. 190, citing Scott vs. Platt, 177 Ore. 515.)
Redemption or purchase of interest
charged.
(1) Redemptioner. — The interest of the debtor-partner so
charged may be redeemed or purchased with the separate
property of any one or more of the partners, or with partnership
property but with the consent of all the partners whose interests
are not so charged or sold.
(2) Redemption price. — In an ordinary sale, the price of the
thing sold theoretically represents its market or actual value.
This is not true in a foreclosure sale where mere inadequacy of
the price obtained (normally the amount of the creditor’s claim)
at the sheriff’s sale is not material because the mortgagor is given
the right to redeem. By the same token, the value of the partner’s
interest in the partnership has no bearing on the redemption
price which is likely to be lower since it will be dependent on the
amount of the unsatisfied judgment debt.
(3) Right of redeeming non-debtor partner. — For this reason,
the redeeming non-debtor partner, it is believed, does not acquire
Art. 1814
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
163
absolute ownership over the debtor-partner’s interest but
holds it in trust for him consistent with principles of fiduciary
relationship.
EXAMPLE:
A, B, and C are partners. A is personally indebted to X in
the sum of P5,000.00. X filed a complaint against A and obtained
from the court a final judgment in his favor. If A is insolvent, X
can ask the same court or any competent court for a “charging
order” so that A’s interest in the partnership be attached or
levied upon for the payment of his debt.
The other partners, B and C, may redeem or purchase the
charged interest of A, the debtor-partner, before foreclosure
(i.e., sale) or before the expiration of the redemption period
fixed by the court in its order of sale, without dissolving the
partnership4 but such redemption or purchase is a ground for
the other partners to ask for the dissolution of the partnership.
(Art. 1830[c].)
Right of partner under exemption
laws.
Under Article 1811, a partner cannot claim any right under
the homestead laws or exemption laws when specific partnership
property is attached for partnership debt.
With respect, however, to the partner’s interest in the partnership as distinguished from his interest in specific partnership
property, the partner may avail himself of the exemption laws
after partnership debts have been paid. A partner’s interest or
share in the partnership is really his property. (Art. 1812.)
4
Does the redeeming or purchasing partner acquire the interest of the debtor-partner? In case of redemption, the price ordinarily would be the amount of the creditor’s
claim against the debtor-partner, and the payment would be in the nature of advance to
the latter. On the other hand, in case of purchase, the price would have to be based on the
value of the interest purchased. It would seem that the non-debtor partner will acquire
the interest of the debtor-partner in the second situation but not in the first.
PARTNERSHIP
164
Art. 1814
ILLUSTRATIVE CASE:
Judgment creditor and the receiver of interest of judgment debtorpartners seek to annul mortgages of property executed by the latter,
individually, in favor of a third party.
Facts: C, a bank, has unsatisfied judgment against A and
B, partners in Partnership X. C procured the appointment of
D as receiver of all rights and interests of A and B in and to
the partnership, and also got an order sharing their interest in
the firm with payment of the judgment debt. C and D brought
action to annul certain mortgages encumbering livestock, farm
equipment, and other specific chattels executed in favor of E
not by or for the firm but by A and B, individually.
It is claimed for plaintiffs that the mortgages in question are
void. The principal argument for defendants is that, whatever
the status of the mortgages, neither plaintiff can question them.
Issue: Is the argument of the defendants tenable?
Held: No. (1) Partner’s interest, not in specific partnership
property, but in partnership itself. — Tenancy in partnership is a
restricted adaptation of the common-law joint tenancy to the
particular needs of the partnership relation. One of those needs
arose from the formerly conflicting claims to specific partnership property of (1) separate creditors of a partner, and (2) assignees of a partner’s share in an aliquot part of the firm assets.
To meet that need, two simple “incidents” have been attached to the tenancy of the partnership: (1) expressly, the interest of each tenant or partner in specific partnership property is
put beyond reach of his separate creditors; and (2) it has been
made non-assignable. This means simply that the partner-owner is deprived of all power of separate disposition even by will.
All a partner has now, subject to his power of individual
disposition, and all that is subject to the claims of his separate
creditors, is his interest, not in specific partnership property,
but in the partnership itself. Plain is the purpose that all partnership property is to be kept intact for partnership purposes
and creditors.
(2) Receiver of partner’s “share in profits” entitled to relief. —
It follows that a receiver of a partner’s “share of profits,” acting
under a charging order and Section 28 (Art. 1814.) has the right in
a proper action to have adjudicated the nullity of any mortgage
Art. 1814
OBLIGATIONS OF THE PARTNERS
Property Rights of a Partner
or any other assignment by some but not all of the partners of
their interest in specific property of the partnership less than
the whole. Such a receiver is entitled to any relief under the
language of the statute “which the circumstances of the case
may require” to accomplish justice under the law. Obviously, a
part of such relief is the avoidance of any unauthorized attempt
to dispose of the partnership property.
Such a receiver is entitled to the “share of the profits and
surplus” of the partner who happens to be the judgment
debtor. While he is not entitled to the management of the firm
as a partner, the receiver would be of little use if he could not
protect “profits and surplus” by preventing such unauthorized
and illegal dissipations of firm assets. (Windom National Bank
vs. Klein, 254 N.W. 602 [Minn. 1934].)
— oOo —
165
166
PARTNERSHIP
SECTION 3. — Obligations of the Partners with
Regard to Third Persons.
ART. 1815. Every partnership shall operate under a
firm name, which may or may not include the name of
one or more of the partners.
Those who, not being members of the partnership,
include their names in the firm name, shall be subject to
the liability of a partner. (n)
Requirement of a firm name.
(1) Meaning of word “firm.” — The word “firm” is defined
as the name, title, or style under which a company transacts
business; a partnership of two or more persons; a commercial
house. In its common acceptation, the term implies a partnership.
The term is also used as synonymous with “company,” “house,”
and “concern.” (68 C.J.S. 405, 488; 31 Words and Phrases 324.)
(2) Importance of having a firm name. — A partnership must
have a firm name under which it will operate. A firm name is
necessary to distinguish the partnership which has a distinct and
separate juridical personality (Art. 1768.) from the individuals
composing the partnership and from other partnerships and
entities. Under the Business Name Law (Sec. 1, Act No. 3883, as
amended.), such firm name must be registered with the Bureau
of Commerce (now with the Intellectual Property Office created
under R.A. No. 8293).
(3) Right of partners to choose firm name. — The partners enjoy
the utmost freedom in the selection of the partnership name. As
a general rule, they may adopt any firm name desired. The firm
name of a partnership may be that of an individual partner, the
surnames of all the partners, or the surname of one or more of the
members with the addition of “and Company,” or it may consist
166
Art. 1815
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
167
of individual names wholly distinct from the names of any of the
members, or it may be a name purely fanciful or fictitious. But
whatever the firm name may be, the signature of the firm name
is, in law, the signature of the several partners’ name. (68 C.J.S.
487-488.)
(a) Use of misleading name. — The partners cannot use a
name that is “identical or deceptively confusingly similar to
that of any existing [partnership] or corporation or to any
other name already protected by law or is patently deceptive,
confusing or contrary to existing laws” (Sec. 18, Corporation
Code.), as to mislead the public by passing itself off as another
partnership or corporation, or its goods or services as those
of such other company.
(b) Use of names of deceased partners. — The Supreme
Court has ruled that a partnership cannot continue to use
in its firm name, the names of deceased partners for such
use “will run counter to Article 1815. It is clearly tacit in the
above provision that names in a firm name of a partnership
must either be those of living partners and, in the case of nonpartners, should be living persons who can be subjected to
liability. In fact, Article 1825 prohibits a third person from
including his name in the firm name under pain of assuming
the liability of a partner.” (In the Matter of the Petition for
authority to continue use of the firm name “SyCip, Salazar,
etc.”/“Ozaeta, Romulo, etc.,” 92 SCRA 1 [1979].)
This ruling must be considered abandoned in view of
Rule 3.02 of the Code of Professional Responsibility approved
and adopted by the Supreme Court on June 21, 1988 which
provides: “In the choice of a firm name, no false, misleading
or assumed name shall be used. The continued use of the
name of a deceased partner is permissible provided that the
firm indicates in all its communications that said partner is
deceased.”
EXAMPLE:
A, who retired as a member of partnership X, executed a
legacy to the partnership then composed of B, C, and D. A few
years later, A died. At the time of his death, the partnership
PARTNERSHIP
168
Art. 1815
was composed of E, F, and G, the former members having
predeceased A. The partnership was continued by agreement
of the parties whenever there was a change in membership.
The legacy vests in partnership X, notwithstanding that
E, F, and G were unknown to A during his lifetime. It may be
argued, however, that the intention of A was to give the legacy
to the old partnership which no longer exists.
ILLUSTRATIVE CASE:
A law firm seeks the continued use of the name of a deceased
partner in the firm name.
Facts: “A, B, C, D, and E” (which are family names) is the
firm name of a law partnership. A passed away. B, C, and D, the
surviving partners, filed a petition for authority to continue use
of the firm name “A, B, C, D, and E.”
Issue: May the partnership continue the use of the name of
the deceased partner?
Held: No. The use of the name of A will run counter to Article
1815. In fact Article 1830(5) clearly ordains that a partnership
is dissolved by the death of any partner. Unlike in the United
States, in our jurisdiction there is no local custom that sanctions
the practice of allowing the continued use of a deceased or
former partner’s name in the firm name of law partnerships,
and even if such a custom exists, the same cannot be applied
as it is contrary to law. Firm names, under our custom, identify
the more active and/or more senior members or partners of the
law firm.
Prescinding the law, there could be practical objections to
allowing the use by law firms of the names of deceased partners.
The public relations value of the use of an old firm name can
tend to create undue advantages and disadvantages in the
practice of the profession. An able lawyer without connections
will have to make a name for himself starting from scratch.
Another able lawyer, who can join an old firm, can initially ride
on that old firm’s reputation established by deceased partners.
Moreover, the possibility of deception upon the public,
real or consequential, cannot be ruled out. A person in search
of legal counsel might be guided by the familiar ring of a
distinguished name appearing in a firm title.
Art. 1816
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
169
The name of a deceased partner may, however, be included
in the listing of individuals who have been partners in the firm
indicating the years during which they served as such. (Ibid.)
Note: As mentioned before, Rule 3.02 of the Code of
Professional Responsibility allows or permits the surviving
partners of a law firm the continued use of the name of a
deceased partner provided there is an indication that the said
partner is already dead.
Liability for inclusion of name
in firm name.
Persons who, not being partners, include their names in the
firm name do not acquire the rights of a partner (see Art. 1767.)
but under Article 1815, they shall be subject to the liability of a
partner (Art. 1816.) insofar as third persons without notice are
concerned. (see Jo Chung Cang vs. Pacific Commercial Co., 45
Phil. 142 [1923]; Phil. National Bank vs. Lo, 50 Phil. 803 [1927].)
Such persons become partners by estoppel. (Art. 1825.)
Article 1815 does not cover the case of a limited partner who
allows his name to be included in the firm name (Art. 1846.),
or of a person continuing the business of a partnership after
dissolution, who uses the name of the dissolved partnership or
the name of a deceased partner as part thereof. (Art. 1840, last
par.)
ART. 1816. All partners, including industrial ones,
shall be liable pro rata with all their property and after
all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and
for the account of the partnership, under its signature
and by a person authorized to act for the partnership.
However, any partner may enter into a separate obligation to perform a partnership contract. (n)
Liability for contractual obligations
of the partnership.
(1) Partnership liability. — Partners are principals to the other
partners and agents for them and the partnership. They are liable
170
PARTNERSHIP
Art. 1816
to third persons who have dealt with one of them in the same
way that a principal is liable to third persons who have dealt
with an agent. (see Art. 1818.)
The general rule is that a partner has the right to make all
partners liable for contracts he makes for the partnership in the
name and for the account of the partnership but only if the partner
was authorized, i.e., he had actual (or apparent) authority. The
authority can be expressly granted in the partnership agreement
or by the other partners subsequently. A partner has implied
authority to bind the partnership in transactions that are for the
purpose of “carrying on in the usual way the business of the
partnership.’’ (Art. 1818, par. 1.)
(2) Individual liability. — A partner, however, may assume a
separate undertaking in his name with a third party to perform
a partnership contract or make himself solidarily liable on a
partnership contract. In such case, the partner is personally
bound by his contract even if only the partnership is shown to
have derived benefits from it.
Nature of individual liability of partners.
Article 1816 lays down the rule that the partners, including
the industrial partner, are liable to creditors of the partnership
for the obligations contracted by a partner in the name and for
the account of the partnership. The debts and obligations of the
partnership are, in substance, also the debts and obligations of
each individual member of the firm. Their individual liability to
creditors is pro rata and subsidiary.1
(1) Pro rata. — As used in the law, the term must be understood to mean equally or jointly, and not proportionately which
is its literal meaning, because the pro-rating is based on the number of partners and not on the amount of their contributions to
the common fund, subject to adjustment among the partners.
(see Art. 1839[4].)
1
All persons (not stockholders or members) who assume to act as a corporation
knowing it without authority to do so, shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof. (Sec. 21, B.P. Blg. 68 [Corporation Code of the Philippines].)
Art. 1816
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
171
The fact that a partner has left the country and the payment
of his share of the liability cannot be enforced (see Co-Pitco
vs. Yulo, 8 Phil. 544 [1907].); or his liability is condoned by the
creditor (Island Sales, Inc. vs. United Pioneers Gen. Construction
Co., 65 SCRA 544 [1975].) cannot increase the liability of the
other partners. Article 1816 refers to the extent of the share of the
partners in the partnership liability for its contractual debts. It
should be read together with Article 1824 where a third person
can hold the partners solidarily liable for the whole obligation if
his case falls under Article 1822 or Article 1823. (Muñasque vs.
Court of Appeals, 139 SCRA 533 [1985].)
Under Article 127 of the Code of Commerce, all members of a
general partnership “are liable personally and in solidum with all
their property.” The basic rule (Art. 1698.) in the old Civil Code
on the personal but subsidiary liability of the partners pro rata for
the obligations of the partnership has been retained. (now Arts.
1816 and 1817.) “The Commission considers the solidary liability
laid down in the Code of Commerce as inadvisable, such liability
being one of the causes of the reluctance and fear with which the
formation of business partnerships has been regarded by all.”
(Report of the Code Commission, pp. 148-149.)
(2) Subsidiary or secondary. — It is subsidiary or secondary
because the partners become personally liable only after all the
partnership assets have been exhausted. (see, however, Arts.
1826, 1834 [par. 2], 1835 [par. 2, 1840], 2nd and last pars.) Thus,
the partners are liable as guarantors2 in favor of partnership
creditors to the extent that the assets of the firm are not sufficient
to meet its obligations. They may be joined as party defendants
in the same action against the partnership subject to their right to
prior exhaustion of partnership property. (Compania Maritima
vs. Muñoz, 9 Phil. 326 [1907]; see De los Reyes vs. Tukban, 35
Phil. 757 [1916]; Vda. de Chan Diaco vs. Peng, 53 Phil. 906 [1929];
Phil. National Bank vs. Lo, 52 Phil. 802 [1929].)
2
Art. 2047. By guaranty, a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
x x x. (1822a)
PARTNERSHIP
172
Art. 1816
(3) Liability of industrial partner. — Even the industrial partner
who, ordinarily, is not liable for losses (Art. 1797.) would have
to pay but, of course, he can recover the amount he has paid
from the capitalist partners unless there is an agreement to the
contrary. Neither on principle nor on authority can the industrial
partner be relieved from liability to third persons for the debts
of the partnership. (Compania Maritima vs. Muñoz, 9 Phil. 326
[1907].)
ILLUSTRATIVE CASE:
In a complaint against a partnership and five partners, the
complaint as to one of the partners was dismissed, and the four
claimed that the liability of each of them should not exceed 1/5 of the
entire obligation.
Facts: X company, a general partnership, purchased from
A a motor vehicle on installment basis. Upon failure of the
partnership to pay an installment, A sued it and the five partners,
B, C, D, E, and F. B failed to file an answer and was declared
in default. Subsequently on motion of A, the complaint was
dismissed insofar as F was concerned. The rest of defendants
failed to appear at the hearing and were declared in default.
Judgment was rendered against the partnership and the
four partners, B, C, D, and E. B and C moved to reconsider,
saying that since there were five general partners, the joint and
subsidiary liability of each partner should not exceed one-fifth
of the obligations of the company. The lower court denied the
motion, hence the appeal.
Issue: Should B, C, D, and E alone be held liable for the
obligation of the company in view of the dismissal of the
complaint with respect to F?
Held: No. In the instant case, there were five general partners
when the promissory note in question was executed for and in
behalf of the partnership. Since the liability of the partners are
pro rata, the liability of each partner shall be limited to only onefifth of the obligations of X company. The fact that the complaint
against F was dismissed, upon motion of A, does not unmake
F as a general partner in the defendant company. (Island Sales,
Inc. vs. United Pioneers General Construction Company, 65 SCRA
554 [1975]; see Dietrich vs. Freeman, 18 Phil. 341 [1911]; CoPitco vs. Yulo, 8 Phil. 544 [1907].)
Art. 1816
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
173
Distinction between a liability
and a loss.
There is a marked distinction between a liability and a loss.
(1) The inability of a partnership to pay debt to a third party
at a particular time does not necessarily mean that the partnership
business, as a whole, has been operated at a loss. The partnership
may have outstanding credits which for the moment may be
unavailable for the payment of debts, but which eventually may
be realized upon and yield profits more than sufficient to cover
all losses.
(2) The exemption of the industrial partner to pay losses
relates exclusively to the settlement of the partnership affairs
among the partners themselves and has nothing to do with the
liabilities of the partners to third persons. An industrial partner is
not exempted from liability to third persons for the debts of the
partnership. (Compania Maritima vs. Muñoz, 9 Phil. 326 [1907].)
Article 1816 refers to “liabilities” while Article 1797 speaks of
“losses.” There is, therefore, no conflict between the two articles.
(Pacific Commercial Co. vs. Aboitiz & Martinez, 48 Phil. 841
[1926].)
No distinction between obligations
and losses.
During the existence of a partnership, the gains or the losses
are set off, the one against the other, and the difference is either
in favor of or against the concern. As to the industrial partner, it
is not a matter of striking a balance from time to time, but one
of the final adjustment of assets and liabilities. As long as there
is property belonging to the partnership, obligations in favor of
third persons are covered by the primary and direct responsibility
of the partnership.
The question arises when the assets of the partnership are
exhausted and it becomes necessary to enforce the subsidiary
liability of the private property of the partners. In this case, such
obligations constitute the extreme losses in the liquidation of the
partnership. (Compania Maritima vs. Muñoz, supra.)
PARTNERSHIP
174
Art. 1817
EXAMPLE:
A and B are capitalist partners, with C as an industrial
partner. A and B contributed P10,000.00 each to the capital
of the partnership. A contractual liability of P26,000.00 was
incurred by the partnership in favor of D.
Under Article 1816, D can sue the firm and all the partners including C, the industrial partner. The capital assets of
P20,000.00 shall first be exhausted thereby leaving an unsatisfied liability of P6,000.00. D can recover the amount from A, B,
and C jointly or pro rata at P2,000.00 each. After paying D, C
can recover for reimbursement of P1,000.00 each from A and B.
Under Article 1797, he is exempted from the loss of P6,000.00 as
among themselves, unless there is a stipulation to the contrary.
If, in the same example, the capital contributions of A and
B are P15,000.00 and P5,000.00, respectively, in the absence of
stipulation, they share in the loss of P6,000.00 in proportion to
their contributions, to wit: A — 3/4 or P4,500.00, and B — 1/4
or P1,500.00. Hence, B can recover P500.00 and C, P2,000.00
from A.
ART. 1817. Any stipulation against the liability laid
down in the preceding article shall be void, except as
among the partners. (n)
Stipulation against liability.
A stipulation among the partners contrary to the pro rata and
subsidiary liability expressly imposed by Article 1816 is void and
of no effect insofar as it affects the rights of third persons. It is
valid and enforceable only as among the partners.
EXAMPLE:
A, B, and C are partners in a business. Each of them
contributed P10,000.00 each. They stipulated that the liability
of A shall not exceed his capital contribution.
Thus, if the partnership assets have been exhausted and
there still remains an unpaid balance of P9,000.00 in favor
of creditor D, the latter can still recover P3,000.00 each from
the partners as their stipulation cannot adversely affect him.
However, since the agreement is binding among the partners,
Art. 1818
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
A is entitled to credit from B and C for the amount of P3,000.00
paid by him to D. A, however, cannot recover his contribution
of P10,000.00. (see Art. 1799.)
ART. 1818. Every partner is an agent of the partnership
for the purpose of its business, and the act of every
partner, including the execution in the partnership
name of any instrument, for apparently carrying on
in the usual way the business of the partnership of
which he is a member binds the partnership, unless
the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person
with whom he is dealing has knowledge of the fact that
he has no such authority.
An act of a partner which is not apparently for the
carrying on of the business of the partnership in the
usual way does not bind the partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they have abandoned the business, one or more but
less than all the partners have no authority to:
(1) Assign the partnership property in trust for
creditors or on the assignee’s promise to pay the debts
of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible to carry on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction
on authority shall bind the partnership to persons
having knowledge of the restriction. (n)
175
176
PARTNERSHIP
Art. 1818
Power of partner as agent
of partnership.
In the absence of an agreement to the contrary, all partners
have equal rights in the management and conduct of the
partnership business. (Art. 1803.)
(1) As among themselves. — When a partner performs an act
within the scope of his actual, implied, or apparent authority, he
is not only a principal as to himself, but is also for all purposes,
an agent as to his co-partners or to the partnership, considered
as a group. Thus, his act concerning partnership business and
every contract signed in the partnership name bind the firm.
The general rules of law applicable to agents likewise apply to
partners. Each partner is a fiduciary of the other partners.
As a matter of fact, the law of partnership is a branch of the
law of agency. Accordingly, the liability of one partner for the acts
of his co-partners is founded on the principle of mutual agency.3
(40 Am. Jur. 224.)
(2) As to third persons. — Limitations upon the authority of
any one of the partners are not binding upon innocent third
persons dealing with the partnership (Art. 1818, par. 4.), who
have the right to assume that every general partner has power
to bind the partnership especially those partners acting with
ostensible authority, by whatever is proper for the transaction in
the ordinary and usual manner of the business of the partnership.
(a) No duty to make inquiries as to acting partner’s authority.
— Third persons are not bound, in entering into a contract
with any of the partners, to ascertain whether or not the
partner with whom the transaction is made has the consent
of the other partners. The public should not make inquiries
as to the agreements had between the partners. The regular
course of a business procedure does not require that each time
a third person contracts with one of the managing partners,
he should inquire as to the latter’s authority to do so, or that
he should first ascertain whether or not the other partners
3
While to a great extent partnership law derives from the agency law, the former is
distinct from the latter. (see “Agency distinguished from partnership’’ under Article 1868,
Chap. 1, Part II.)
Art. 1818
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
177
had given their consent thereto. His knowledge is enough
that he is contracting with a partner.
(b) Presumption that acting partner has authority to bind
partnership. — There is a general presumption that each
individual partner is an agent of the firm and that he has
authority to bind the firm in carrying on the partnership
transactions. The presumption is sufficient to permit third
persons to hold the firm liable on transactions entered into
by any one of the members of the firm acting apparently in its
behalf and within the scope of his authority. (Litton vs. Hill
& Ceron, 67 Phil. 513 [1939], cited under Art. 1802; Goquiolay
vs. Sycip, 105 Phil. 984 [1960] and 9 SCRA 663 [1963]; see
Muñasque vs. Court of Appeals, 139 SCRA 533 [1985].)
(c) No right to assume that acting partner has unlimited
authority. — The apparent scope of the partner’s authority
is the whole scope of the partnership’s customary business.
However, third parties should not assume that a partner has
unlimited authority. Generally, a partner has no authority
to do the acts enumerated in the third paragraph of Article
1818. When a third party deals with a partner who has no
express, implied, or apparent authority, the partnership is
not liable for his acts unless the other partners ratify his acts
or are estopped from asserting the partner’s lack of authority.
Liability of partnership for acts
of partners.
The acts of a partner mentioned in Article 1818 may be
grouped into three.
(1) Acts for apparently carrying on in the usual way the business
of the partnership (par. 1.). — Every partner is an agent and may
execute such acts with binding effect on the partnership even if
he has in fact no authority unless the third person has knowledge
of such lack of authority.
In other words, there are two requisites in order that the
partnership will not be liable:
(a) The partner so acting has in fact no authority; and
PARTNERSHIP
178
Art. 1818
(b) The third person knows that the acting partner has no
authority.
EXAMPLES:
(1) A, B, and C are partners in the buying and selling of
home appliances. The sale of a refrigerator by C to D is binding
upon the partnership because it is apparently for carrying on
in the usual way the business of the partnership even if C had,
in fact, no authority.
But if D had knowledge of such lack of authority, then the
partnership would not be bound by the act of C.
(2) Where the partnership business is to deal in merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not in line with the normal business of the
firm.
But where the express and avowed purpose of the partnership is to buy and sell real estate, the immovables thus acquired by the firm form part of its stock-in-trade (not merely as
business site), and the sale thereof is in pursuance of partnership purposes, hence, within the ordinary powers of the partner. (Goquiolay vs. Sycip, 9 SCRA 663 [1963].)
Usual way may be interpreted as meaning usual for the
particular partnership or usual for similar partnerships. (Crane,
op. cit., p. 243.) Actually, the acts mentioned in No. (1) refer only
to acts of administration (see Art. 1800.) as distinguished from
acts of strict dominion or ownership.
EXAMPLE:
P, partner, makes an agreement with T to sell the furnishings
of an office maintained by the partnership in connection with
its business.
May T enforce the agreement against the partnership?
No. The general rule is that a single partner has no implied
power to sell partnership property not held for sale. (Teller, op.
cit., p. 185.)
Art. 1818
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
179
(2) Acts of strict dominion or ownership (pars. 2 and 3.). — For
acts which are not apparently for carrying on in the usual way
the business of the partnership, the partnership is not bound,
unless authorized by all the other partners or unless they have
abandoned the business. The general rule is that powers not
specifically delegated in a partnership agreement are presumed
to be withheld.
(a) The instances of acts which are generally outside
the implied power of a partner are enumerated in the third
paragraph. They constitute limitations to the authority
granted to the partners to bind the partnership.
(b) Whatever acts are done by any partner in regard
to partnership property or contracts beyond the scope and
objects of the partnership, must, in general, to bind the
partnership, be derived from such further authority, express
or implied, conferred upon such partner, beyond that resulting
from his character as partner. This principle is incorporated
in the second paragraph of Article 1818. In the application of
this principle, it is held that where a partnership is limited to
a particular trade or business, one partner cannot bind his copartner by any contract not relating to such trade or business,
or by any contract made after such business is concluded.
(c) Similarly, if the purposes of a partnership are limited
or special, third persons cannot obtain credit on the faith of
the firm in relation to a matter foreign to its objects, although
if the objects of the partnership are general, the power to bind
may be equally general. (40 Am. Jur. 227.)
(3) Acts in contravention of a restriction on authority (par. 4.).
— The partnership is not liable to third persons having actual or
presumptive knowledge of the restrictions, whether or not the
acts are for apparently carrying on in the usual way the business
of the partnership. For example, when a partnership is formed for
a special purpose and is limited, and a partner gives promissory
notes in the name of the firm for his individual obligation, the
other partner is not liable, if the notes are issued without the
latter’s knowledge or consent, and the person receiving them is
aware that they are not issued for a firm debt.
180
PARTNERSHIP
Art. 1819
On the other hand, persons not having such notice have a
right to assume that the authority of a partner is co-extensive with
the business transacted by his firm. Thus, it is always presumed,
when there is no evidence to the contrary, that when a member
of a firm borrows money or gives a note in the name of the firm,
the transaction is for a partnership purpose, and the burden of
proof is on the firm to show the contrary, and a contract made
by a partner in the name of the firm is prima facie binding on the
firm unless it is made outside the firm’s business. (40 Am. Jur.
230-231.)
Liability of partner acting without
authority.
As a general rule, the particular partner who undertakes to
bind his co-partners by a contract without authority is himself
personally liable on such contract.
Such partner binds himself no matter in what name he
contracts. The fact that he attempts to bind his co-partners and
does not succeed does not avoid his own act. He cannot be
admitted to say that he was not authorized to make a contract, as
he is estopped to deny its effect or validity. (Ibid., 235.)
ART. 1819. Where title to real property is in the
partnership name, any partner may convey title to such
property by a conveyance executed in the partnership
name; but the partnership may recover such property
unless the partner’s act binds the partnership under the
provisions of the first paragraph of article 1818, or unless such property has been conveyed by the grantee or
a person claiming through such grantee to a holder for
value without the knowledge that the partner, in making the conveyance, has exceeded his authority.
Where title to real property is in the name of the
partnership, a conveyance executed by a partner, in his
own name, passes the equitable interest of the partnership, provided the act is one within the authority of the
Art. 1819
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
181
partner under the provisions of the first paragraph of
article 1818.
Where title to real property is in the name of one
or more but not all the partners, and the record does
not disclose the right of the partnership, the partners
in whose name the title stands may convey title to such
property, but the partnership may recover such property if the partners’ act does not bind the partnership
under the provisions of the first paragraph of Article
1818, unless the purchaser or his assignee, is a holder
for value, without knowledge.
Where the title to real property is in the name of one
or more or all the partners, or in a third person in trust
for the partnership, a conveyance executed by a partner
in the partnership name, or in his name, passes the equitable interest of the partnership, provided the act is
one within the authority of the partner under the provisions of the first paragraph of article 1818.
Where the title to real property is in the names of all
the partners a conveyance executed by all the partners
passes all their rights in such property. (n)
Conveyance of real property belonging
to the partnership.
(1) Prima facie ownership of real property. — The ownership of
real estate is prima facie that indicated by the muniment of title.
Ordinarily, title to real property or interest therein belonging to
the partnership is registered in the partnership name. However,
for one reason or another, the title to the property is not held
by the partnership, although as between the partners there is no
question that it is a partnership property. The presumption is
that, property purchased with partnership funds belongs to the
partnership unless a contrary intent is shown.
(2) Legal effects of conveyance. — Article 1819 gives the legal
effects of the conveyance of real property belonging to the
partnership depending in whose name it is registered and in
PARTNERSHIP
182
Art. 1819
whose name it is conveyed. Under the article, the real property
may be registered or owned in the name of:
(a) The partnership (pars. 1, 2.);
(b) One or more but not all the partners (par. 3.);
(c) One or more or all the partners, or in a third person in
trust for the partnership (par. 4.); or
(d) All the partners. (par. 5.)
(3) Scope of term “conveyance.’’ — It will be noticed that under
paragraphs 1, 3, and 5 of Article 1819, what is conveyed is title or
ownership, while under paragraphs 2 and 4, what is conveyed is
merely the equitable interest. The term “conveyance” used in the
last paragraph, which is taken from Section 10 of the American
Uniform Partnership Act, has been interpreted to include a
mortgage. Thus, the right to mortgage is included in the right to
convey. This is different from the rule in agency (Art. 1879.) that
a special power to sell excludes the power to mortgage. (Santiago
Syjuco, Inc. vs. Castro, 175 SCRA 171 [1989].)
EXAMPLES:
(1) Title in partnership name, conveyance in partnership name
(par. 1.). — A, B, and C are partners in a partnership known as X
& Co. A sold a parcel of land registered in the name of X & Co.
to D without express authority.
The conveyance passes title to D; but X & Co. can recover
the property if (a) the conveyance was not in the usual way
of business, or (b) D had knowledge of the fact that A has no
authority even though the conveyance was made in the usual
way of business.
In no case may the partnership recover if D had, in turn,
conveyed the property to E who had no knowledge of A’s lack
of actual authority in making the conveyance to D.
(2) Title in partnership name, conveyance in partner’s name
(par. 2.). — In the same example, if the sale was executed by A in
his own name to D, the latter does not become the owner of the
land. He gets only the equitable interest of X & Co., assuming
that the selling of the land is in the usual course of business of
the partnership.
Art. 1819
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
183
D would not be entitled even to the equitable interest if:
(a) X & Co. is not engaged in the buying and selling of
lands; or
(b) D had knowledge of A’s lack of authority although
the sale was made in the usual course of business.
Equitable interest or title is one not duly recognized by law
but in equity alone; it is a right or interest in property which
is imperfect and unenforceable at law but which, under wellrecognized equitable principles, should be and is convertible
into a legal right or title. (30 C.J.S. 401.)
(3) Title in name of one or more partners, conveyance in name of
partner or partners in whose name title stands (par. 3.). — Although
the parcel of land in question really belongs to the partnership
X & Co., it is, however, registered in the name of A and the
record does not disclose the right of X & Co. In this case, if A
sold the land in his own name to D, title is conveyed to D. The
effect is the same as in paragraph 1.
(4) Title in name of one or more or all partners or a third person
in trust for partnership, conveyance executed in partnership name
or in name of partner. — Suppose the parcel of land is in the
name of A in trust for the partnership X & Co. If A sells the land
to D in the name of X & Co. or in his (A’s) name, the conveyance will pass only the equitable interest of X & Co., A, being
a mere trustee of the partnership. The rule is the same as in
paragraph 2.
(5) Title in name of all partners, conveyance in name of all
partners. — If the parcel of land is registered in the name of
A, B, and C, conveyance made by all of the partners to D will
pass title to the property for the law says “a conveyance by all
the partners passes all their rights in such property.” The effect
obviously would be the same though the sale is not in the usual
course of business of X & Co.
Innocent purchasers without notice.
Regardless of the fact that one partner cannot convey partnership realty without the concurrence of his co-partners, it is
fundamental that innocent purchasers without notice may be
protected.
(1) Where the legal title is in the partner making the conveyance, although the equitable title is in the firm, a purchaser with-
184
PARTNERSHIP
Art. 1819
out notice may acquire a valid title, since he has the right to presume that possession or interest of the partnership is subordinate
to and not inconsistent with the record title.
(2) Under Article 1819, a conveyance by a partner of
partnership property in the partnership name even though
without authority, cannot be recovered by the partnership where
it has been conveyed by the grantee to a holder for value and
without notice or knowledge that the partner, in making the
conveyance, had exceeded his authority. (par. 1.)
(3) The purchaser need not have either actual or constructive
notice of any trust or other condition limiting the authority of the
partner making the conveyance. Notice of a partnership interest
in real property is not created by mere knowledge of the fact that
the holder of the legal title is a member of a partnership which
is using the property for partnership purposes. The title of such
purchaser will be protected. (40 Am. Jur. 251.)
Authorization or ratification
of conveyance.
A conveyance of partnership realty by one partner may be
authorized by his co-partners, or when made without authority,
may be ratified by them. Such authority or ratification must
affirmatively appear, for the authority of one partner to make and
acknowledge a deed for the partnership will not be presumed.
(1) After the lapse of many years from the time of execution of
a conveyance by a partner purporting to act for the partnership,
authority or ratification will be presumed.
(2) It has sometimes been said that the authority to execute
a deed in behalf of a firm should be conferred in writing and not
by parol (see Art. 1874.), although the decisions on the point are
not wholly uniform, partners having been held bound because of
previous parol authority.
(3) It has also been held that one partner, in the presence of
his co-partners, may, by parol authority, execute a deed for them
which will amount to an execution of the deed of all the partners.
(4) The authority may also be implied from the nature of the
partnership business, and where a firm is engaged in the business
Art. 1820
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
185
of buying and selling real estate, a contract of sale executed by
one of the partners in the firm name is valid.
(5) When a deed is executed on behalf of a firm by one
partner, the other partner will also be bound if there is subsequent
adoption of the act.
(6) A ratification may be inferred from the presence of the
other partners at the execution and delivery, or from their acting
under it or knowingly taking the benefits arising therefrom. (40
Am. Jur. 251-256.)
ART. 1820. An admission or representation made by
any partner concerning partnership affairs within the
scope of his authority in accordance with this Title is
evidence against the partnership. (n)
Admission by a partner.
As a general rule, a person is not bound by the act, admission,
statement, or agreement of another of which he has no knowledge
or to which he has not given his consent except by virtue of a
particular relation between them. (Samilliano vs. Samilliano,
[C.A.] 52 O.G. 4296.)
(1) Admissions by a party as testified to by a third person are
admissible in evidence against him in litigation.
(2) Admissions by another are received against a party if
the former is acting in the capacity of agent of the latter. Thus,
under Article 1820, the admission of a partner made during the
existence of the partnership are binding against the partnership
(and co-partners) when such admissions refer to a matter
concerning partnership affairs and made within the scope of his
authority.
(3) When a partner makes admissions for himself only
without purporting to act for the partnership, he alone shall be
chargeable with his admissions.
(4) After dissolution, admission made by a partner will bind
the co-partners if connected with the winding up of partnership
affairs. (see Art. 1834.)
PARTNERSHIP
186
Art. 1820
EXAMPLES:
(1) A borrowed P1,000 from B in whose favor he executed
a promissory note. A made the statement that he was acting for
C and that the money was intended for C. C never authorized
A to borrow money from B. The declaration of A that he was
acting for C and that the money was intended for C is not
admissible against C as to make him liable to B.
(2) Suppose C said on one occasion in the presence of D
that he received the money or that the contract was entered
into by A with his (C’s) consent, this statement can be testified
to by D in a litigation by B against C.
(3) If A was really an agent of C in the transaction, then,
whatever is said or done by A while acting within the scope of
his authority is admissible against C, his principal, the same as
if C personally entered into the contract with B.
(4) Assuming that A is a partner and C is the partnership,
it is clear, on the same legal principle, that the statement of A
while transacting the business of the partnership within the
scope of his authority is evidence against the partnership.
(5) Where, however, A acted in his own name and B
extended the loan on the personal credit of A, any admission
made by A is not binding on C, the partnership.
ILLUSTRATIVE CASE:
A partner made an admission to victim of accident caused by
son of another partner that son was on business for the firm when
accident occurred.
Facts: T sued partnership X composed of A, B, and C for
injuries he suffered as a result of an accident caused by the
son of A, who was driving a car owned by the partnership. B
admitted to T that the son was on business for the partnership
when the accident occurred. Subsequently, A and C denied B’s
statement.
Issue: Does the admission of B make the partnership liable?
Held: No. (1) Admission made not connected with partnership
business. — Whether the admission of liability made by a
partner binds the partnership depends on whether the partner
was acting within the scope of express, implied, or apparent
Art. 1820
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
187
authority at the time of making the statements or declarations.
One partner is not the agent of the firm for purposes of admitting
either the existence of the partnership or that a transaction was
a part of the partnership’s business. A partner cannot by his
declaration alone bring a transaction within the scope of the
business when the facts show that it has no connection with the
partnership business.
The evidence did not show that B was carrying out the
partnership’s business when he admitted the son’s purpose.
(2) Admission made without knowledge or consent of other
partners. — Statements of a partner bind the partnership only if
they are made in the course of, related to, and are material to,
the transaction of the partnership’s business. A partnership is
a joint affair, and to charge it with liability there must be joint
words or actions. An individual partner cannot do this.
Neither A nor C spoke for the firm; neither consented for B
to speak. (Caswell vs. Maplewood Garage, 149 A 746 [Sup. Ct. N.H.
1930].)
Existence of partnership
must be proved.
(1) Before the partnership can be charged with the admission
of a partner under Article 1820, the partnership relation must be
shown and proof of that fact must be made by evidence other than
the admission itself. (Sec. 29, Rule 130,4 Rules of Court.) Hence, if
in the example given (No. 4.), the existence of the partnership is
denied, B must first prove the same by evidence other than the
statement of A before such statement can be used as evidence
against the partnership.
(2) Once the existence of the partnership relation has been
proven by other independent evidence, statements or admissions,
made by any partner speaking for the partnership concerning
4
Sec. 29. Admissions by co-partner or agent. — The act or declaration of a partner or
agent of the party within the scope of his authority and during the existence of the partnership or agency, may be given in evidence against such party after the partnership or
agency is shown by evidence other than such act or declaration. The same rule applies
to the act or declaration of a joint owner, joint debtor, or other person jointly interested
with the party.
PARTNERSHIP
188
Art. 1821
partnership affairs while acting within the scope of his authority
are admissible as evidence against the partnership.
(3) Admissions or declarations made in the presence of the
person to be charged as a partner are admissible to prove the
existence of the partnership. Thus, where A states in the presence
of C that A is a partner in partnership X composed of A and C,
and C remains silent, the statement may be offered in evidence to
show that A and C are partners.
(4) It has been held that an admission made by a partner
who was no longer a partner at the time of the declaration is
not admissible in evidence against the partnership. (Congco vs.
Trilliana, 13 Phil. 194 [1909].)
ART. 1821. Notice to any partner of any matter relating to partnership affairs, and the knowledge of the
partner acting in the particular matter, acquired while a
partner or then present to his mind, and the knowledge
of any other partner who reasonably could and should
have communicated it to the acting partner, operate as
notice to or knowledge of the partnership except in the
case of a fraud on the partnership, committed by or with
the consent of that partner. (n)
Notice to, or knowledge of, a partner of matter
affecting partnership affairs.
Like the law of agency, the law of partnership imputes
notice to, or knowledge5 of, any partner of any matter relating
to partnership affairs to the partnership except in case of fraud.
The reason is that members of a partnership stand in a fiduciary
relationship to one another, and it is presumed that the partners
disclose to one another all relevant information concerning
partnership business.
A third person desiring to give notice to a partnership of
some matter pertaining to the partnership business need not
As to meaning of “notice” and “knowledge,” see comments under Article 1833.
5
Art. 1821
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
189
communicate with all the partners. If notice is delivered to a
partner, that is an effective communication to the partnership
notwithstanding the failure of the partner to communicate such
notice or knowledge to his co-partners.
Cases of knowledge of a partner.
Article 1821 speaks of three cases of knowledge, namely:
(1) Knowledge of the partner acting in the particular matter
acquired while a partner;
(2) Knowledge of the partner acting in the particular matter
then present to his mind; and
(3) Knowledge of any other partner who reasonably could
and should have communicated it to the acting partner.
EXAMPLES:
(1) A, B, and C are partners in partnership X and Co. D
filed an action against X and Co. on a contract. The service of
notice of the complaint made on A only, operates as service to
the partnership or to all the partners.
(2) A, acting for the partnership, bought a parcel of land
from D. Before the sale, A acquired some knowledge that
the land is involved in litigation in which E claims to be the
owner. Nevertheless, A did not convey the information to the
partnership. Later on, E was able to recover the land. In this
case, A’s knowledge is knowledge of the partnership.
The knowledge by A may have been acquired before he
became a partner provided the same was then present to his
mind. This proviso involves a question of fact and it may be
difficult to prove that such knowledge was present to A’s
mind. It is believed, however, that once prior knowledge by the
acting partner is shown, such knowledge must be presumed to
be “then present to his mind,” unless the partnership proves
otherwise.
(3) If B (he is not the acting partner) had received the
information and it is reasonable to believe that he could and
should have communicated it to A (the acting partner), B’s
knowledge also operates as knowledge of the partnership.
However, if B acquired knowledge or notice before he became
190
PARTNERSHIP
Arts. 1822-1824
a partner, then, there is neither notice to nor knowledge of the
partnership.
(4) If A, in the second example, deliberately did not inform
the partnership regarding the claim of E for a consideration
paid or promised by D, the notice to or knowledge of A cannot
be imputed to the partnership, because the law says “except in
the case of a fraud on the partnership committed by or with the
consent of that partner.”
ART. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his
co-partners, loss or injury is caused to any person, not
being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. (n)
ART. 1823. The partnership is bound to make good
the loss:
(1) Where one partner acting within the scope of
his apparent authority receives money or property of a
third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a third person and
the money or property so received is misapplied by any
partner while it is in the custody of the partnership. (n)
ART. 1824. All partners are liable solidarily with the
partnership for everything chargeable to the partnership under articles 1822 and 1823. (n)
Liability arising from partner’s wrongful act
or omission or breach of trust.
(1) Solidary liability. — The above three articles provide for the
solidary liability of the partners and also the partnership to third
persons (Art. 1824.) for the wrongful act or omission (Art. 1822.)
or breach of trust (Art. 1823.) of a partner acting within the scope
of the firm’s business or with the authority of his co-partners.
This is true even though the other partners did not participate
Arts. 1822-1824
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
191
in, or ratify, or had no knowledge of the act or omission, without
prejudice to their right to recover from the guilty partner.
It has been held that in workmen’s compensation cases, the
liability of business partners arising from compensable injury or
death of an employee should be solidary. (Liwanag and Reyes vs.
Workmen’s Compensation Commission, 105 Phil. 741 [1959].)
(2) Different from liability under Article 1816. — This liability
of the partners under the above articles is different from
their liability for contractual obligations as defined in Article
1816. Here, it is solidary, while in Article 1816, it is joint and
subsidiary. Furthermore, while the liability in Article 1816 refers
to partnership obligations, this article covers the liability of the
partnership arising from the wrongful acts or omissions of any
partner. The act or omission is called “quasi-delict’’6 or “tort’’
when it does not constitute a crime or felony punishable by law.
(2) Reason for imposition of wider liability. — The reason for
the law’s imposition of wider liability on the partnership with
respect to torts and breach of trust is based on public policy.
The rule of respondeat superior (also called the rule of vicarious
liability) applies to the law of partnership in the same manner as
other rules governing the agency relationship. (Teller, op. cit., p.
61.)
The obligation is solidary because the law protects him who,
in good faith, relied upon the authority of a partner, whether
such authority is real or apparent. This is the reason why under
Article 1824 all partners, whether innocent or guilty, as well as
the legal entity which is the partnership, are solidarily liable.
(Muñasque vs. Court of Appeals, 139 SCRA 533 [1985].)
(3) Injured party may proceed against partnership or any partner.
— Since the partners are liable solidarily, the party aggrieved has
6
Art. 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter. (1902a)
Art. 2177. Responsibility for fault or negligence under the preceding article is
entirely separate and distinct from the civil liability arising from negligence under the
Penal Code. But the plaintiff cannot recover damages twice for the same act or omission
of the defendant. (n)
192
PARTNERSHIP
Arts. 1822-1824
his election to sue the firm or to sue one or more of its members.
He may even single out for suit a partner who, personally, was in
no wise involved in the commission of the tort or breach of trust.
(40 Am. Jur. 261.)
(4) Requisites for liability. — The following are the requisites
for liability under Article 1822:
(a) The partner must be guilty of a wrongful act or
omission; and
(b) He must be acting in the ordinary course of business,
or with the authority of his co-partners even if the act is
unconnected with the business.
So, the partners are liable for the negligent operation of a
vehicle by a partner, acting in the course of the business which
results in a traffic accident. But if he is driving a partnership-owned
vehicle for purposes of his own, although with the permission of
the other partners, the acting partner alone is liable. (Crane, op.
cit., 280-281.) The partnership is not liable if the partner acted on
his own and not for the benefit of the partnership in the course
of some transaction not connected with the partnership business,
even though he was in a position to commit the act (e.g., fraud)
only because of his being a partner in the business. Neither is the
partnership liable if the wrongful act or omission was committed
after its dissolution and the same was not connected with the
winding up of partnership affairs.
(5) Criminal liability for criminal acts. — A non-acting partner
in a partnership engaged in a lawful business is not criminally
liable for the criminal acts of another partner but he is criminally
liable if the partnership is involved in an unlawful enterprise
with his knowledge or consent.
Partnership liability under Article 1822 does not extend to
criminal liability, such as embezzlement, where the wrongdoing
is regarded as individual in character. So, it has been held that
one member of a law partnership is not subject to disbarment
or discipline for the misconduct of his partner where he had no
knowledge of the misconduct, nor consented to it nor participated
in it. But where the crime is statutory, especially where it involves
a fine rather than imprisonment, even criminal liability may be
Arts. 1822-1824
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
193
imposed. Thus, in a case, a partnership fine was imposed for a
partner’s illegal blasting. (Ibid., p. 62, citing Muñoz vs. State, 87
Fla. 2209; In re Brown, 389 Ill. 516; Spokane vs. Paterson, 46 Wash.
93.) Article 1822 speaks of “any penalty x x x incurred.”
Misapplication of money or property
of a third person.
Under Article 1823, the partnership is liable for any losses
suffered by a third person whose money or property is misappropriated by a partner who received it within the scope of his
authority or by any other partner after it was received by the
partnership in the ordinary course of business while in its custody.
EXAMPLES:
(1) A, B, and C are partners in partnership X & Co. engaged
in a pawnshop business. A received from D a diamond ring as
security for a loan D obtained from the partnership.
In case of the conversion of the ring by A, who received the
same or by B, all of the partners are solidarily liable for the loss
with X & Co. to D. Even the innocent partners are personally
liable without prejudice, of course, to their right to recover
from the guilty partner.
(2) A, B, and C are partners in X & Co., an investment
firm. C fraudulently obtained D’s money in the ordinary
course of the firm’s business and used the money for personal
expenses rather than investing it. A and C did not consent to or
participate in the breach of trust. As a matter of fact, they came
to know of the breach only some years after it had occurred.
All partners are solidarily liable to D.
ILLUSTRATIVE CASES:
1. Partner of a law firm engaged in the practice of labor law
misappropriated money received from a client for investment in the
stock market.
Facts: T hired X, a law firm, to represent Y, T’s company,
in labor negotiation and to advise it on labor matters. P, a
senior partner of X, was responsible for advising Y. T gave P
PARTNERSHIP
194
Arts. 1822-1824
money to invest in the common stock of another company. P
misappropriated the money.
Issue: Is X responsible for the loss?
Held: No. A partner cannot bind the partnership beyond
the normal scope of his authority. In this case, the investment
of money in the stock market was not a function of the practice
of law, and counselling about investments was not a part of X’s
business, which was limited to the practice of labor law. The
criminal conduct of P was not a part of his anticipated services
and T had no right to rely on the firm for the acts of a partner in
excess of the partner’s authority. (Zimmerman vs. Hoag & Allen,
207 SE 2d 287 [App. Ct.] N.C., 1974.)
________
________
________
2. A partner misappropriated payments to partnership with
the result that creditors who supplied materials on credit were not
paid.
Facts: M entered into a contract with T for the renovation
of the latter’s building on behalf of the partnership of “G and
M.” M received the first payment of T with a check made out in
his (M’s) name. M indorsed the check in favor of G so that the
latter could pay for the materials and labor used in the project.
G was able to encash the second check after T changed the
name of the payee from “M” to “G and M,” the duly registered
name of the partnership under which name a mayor’s permit
to do construction business was issued. G misappropriated the
proceeds.
C and D supplied materials on credit to the partnership. M
denied that he and G were partners.
Issues:
(1) Is the payment by T to G valid?
(2) Is the liability of the partners to C and D joint or
solidary?
Held: (1) Yes. M indorsed the first check in favor of G. T,
therefore, had every right to presume that G and M were true
partners. If they were not, then M had only himself to blame for
making the relationship appear otherwise, not only to T but to
their other creditors as well.
(2) It is solidary. Article 1816 should be construed together
with Article 1824 (in connection with Articles 1822 and 1823).
Art. 1825
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
While the liability of the partners is merely joint in transactions
entered into by the partnership, a third person who transacted
with said partnership can hold the partners solidarily liable for
the whole obligation if the case of the third person falls under
Articles 1822 and 1823.
As between the partners G and M, justice dictates that M be
reimbursed by G for the payments made by M representing the
liability of their partnership to C and D as it was satisfactorily
established that G acted in bad faith in his dealings with M as
partner. (Muñasque vs. Court of Appeals, 139 SCRA 533 [1985].)
Note: The Court of Appeals correctly ruled that the liability
of the partners is joint or pro rata under Article 1816. The money
was received by G from T, not from C or D. (See Art. 1823.)
ART. 1825. When a person, by words spoken or written or by conduct, represents himself, or consents to
another representing him to anyone, as a partner in an
existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom
such representation has been made, who has, on the
faith of such representation given credit to the actual
or apparent partnership, and if he has made such representation or consented to its being made in a public
manner he is liable to such person, whether the representation has or has not been made or communicated to
such person so giving credit by or with the knowledge
of the apparent partner making the representation or
consenting to its being made:
(1) When a partnership liability results, he is liable
as though he were an actual member of the partnership;
(2) When no partnership liability results, he is liable
pro rata with the other persons, if any, so consenting
to the contract or representation as to incur liability,
otherwise separately.
When a person has been thus represented to be a
partner in an existing partnership, or with one or more
persons not actual partners, he is an agent of the persons consenting to such representation to bind them
195
196
PARTNERSHIP
Art. 1825
to the same extent and in the same manner as though
he were a partner in fact, with respect to persons who
rely upon the representation. When all the members of
the existing partnership consent to the representation,
a partnership act or obligation results; but in all other
cases it is the joint act or obligation of the person acting
and the persons consenting to the representation. (n)
Partner by estoppel; partnership
by estoppel.
A partnership is ordinarily created by contract among the
parties. Article 1825 recognizes another form of partnership —
partnership by estoppel. It is, however, strictly speaking not a
partnership.
(1) Meaning and effect of estoppel. — Estoppel is a bar which
precludes a person from denying or asserting anything contrary
to that which has been established as the truth by his own deed
or representation, either express or implied. (19 Am. Jur. 61.)
Through estoppel, an admission or representation is rendered
conclusive upon the person making it and cannot be denied or
disapproved as against the person relying thereon. (Art. 1431.)
(2) When person a partner by estoppel. — Persons who are not
partners as to each other are not partners as to third persons. (Art.
1709[1].) No one can be held liable nor claim rights as a partner
unless he has given his consent to become such. An exception
to this rule is provided by Article 1825. Due to the doctrine of
estoppel, one may become liable as a partner even though he is
not a partner in fact.
A person not a partner may become a partner by estoppel
and thus be held liable to third persons as if he were a partner,
when by words or by conduct he:
(a) Directly represents himself to anyone as a partner in
an existing partnership or in a non-existing partnership (with
one or more persons not actual partners); or
(b) Indirectly represents himself by consenting to another
representing him as a partner in an existing partnership or in
a non-existing partnership.
Art. 1825
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
197
In other words, the holding out as a partner may be done
by the person himself, or by his consent or with his knowledge.
To hold the party liable, the third person must prove such
misrepresentation by the purported partner and that a bona fide
or justifiable reliance by him upon it caused him injury.
(3) When partnership liability results. — If all the actual partners
consented to the representation, then the liability of the person
who represented himself to be a partner or who consented to
such representation and the actual partners is considered a
partnership liability. This is a case of partnership by estoppel.
(par. 1[1].) The person becomes an agent of the partnership and
his act or obligation that of the partnership. (par. 2.)
(4) When liability pro rata. — When there is no existing
partnership and all those represented as partners consented
to the representation, or not all of the partners of an existing
partnership consented to the representation, then, the liability
of the person who represented himself to be a partner or who
consented to his being represented as partner, and all those who
made and consented to such representation, is joint or pro rata.
(par. 1[2].)
(5) When liability separate. — When there is no existing
partnership and not all but only some of those represented as
partners consented to the representation, or none of the partners
in an existing partnership consented to such representation,
then the liability will be separate — that of the person who
represented himself as a partner or who consented to his being
represented as a partner, and those who made and consented to
the representation, or that only of the person who represented
himself as partner. (Ibid.)
(6) Estoppel does not create partnership. — It must be emphasized
that Article 1825 does not create a partnership as between the
alleged partners. A contract, express or implied, is essential to the
formation of a partnership. The law considers them as partners
and the association as a partnership only insofar as it is favorable
to third persons by reason of the equitable principle of estoppel.
(McDonald vs. National City Bank of New York, 99 Phil. 156
[1956].)
PARTNERSHIP
198
Art. 1825
In other words, the actual partnership is one thing and liability as partners, another and different thing. It is to be noted that
liability is created only in favor of persons who, on the faith of
the representation, gave credit to the actual or apparent partnership.
(7) Liability as partners may arise contrary to their intentions. —
The liability as a partner of a person who holds himself out as a
partner, or permits another to do so, is predicated on the doctrine
of estoppel and on the policy of the law seeking to prevent frauds
upon those who lend their money on the apparent credit of those
who are held out as partners. This liability as partners may arise
contrary to their own intentions. Thus, one who has received
profits from an apparent partnership transaction is estopped
from denying the relationship on the ground that the partnership
agreement was void. The question of liability is not what the
parties intended by their contract but whether third persons had
a right to rely on their joint credit. (40 Am. Jur. 180-181.)
It is important to understand that one who is deemed to be
liable as a partner by reason of estoppel does not thereby obtain
full rights as a partner. (Barrett & Seago, op. cit., p. 45.)
EXAMPLES:
(1) A, B, and C are partners in X & Co. D represented
himself as a partner in X & Co. to E who, on the faith of such
representation, extended credit to X & Co.
D is a partner by estoppel. He is liable to E as though he is
an actual member of X & Co.
If all the partners A, B, and C consented to the representation,
then a partnership liability results. This is a case of partnership
by estoppel. All the partners and D are liable. (par. 1[1].) Note
that in this case there is an existing partnership and all the
partners consented to the representation.
(2) If only A and B consented to the representation, there
is no partnership liability. Only A, B, and D are partners by
estoppel. They are liable pro rata to E. (par. 1[2].)
(3) But if D acted alone without the consent of A, B, and C,
then he alone is liable to E. He is liable separately. (Ibid.)
Art. 1825
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
(4) Suppose A, B, and C are not really partners, and D
represented himself as a partner of A, B, and C to E.
If the representation was made without the consent of A,
B, and C, D alone shall be liable separately to E. If it was made
with the consent of A, B, and C, then all of them (A, B, C, and
D) shall be liable pro rata to E. They are partners by estoppel.
If only A consented to the representation, separate liability
is created only against A and D. Of course, if D is represented
as a partner in an existing or non-existing partnership without
his consent, he is not liable to E.
In all the cases when there is no existing partnership
(Example No. 4), or there is no consent by all the members of
an existing partnership (Example No. 2), it is the joint act or
obligation of the person acting and the persons consenting to
the representation. (par. 2.)
(5) A is held out with his consent as a partner of B who is
in business by himself. E relied on the representation of B.
Has E a priority on the property in the business of B over
F, a creditor of B, who trusted only B and not the supposed
partnership of A and B?
No. A and B would be liable jointly, but, as there was, in fact,
no partnership fund, E, who thought there was a partnership
of A and B, would have no priority on the assets which B had
in his business as distinguished from his other assets. (see
Commissioners’ Note to Sec. 16, U.P.A., from which Art. 1825
was taken.)
ILLUSTRATIVE CASE:
The misrepresentation that one is a partner was made after the
contract in question was entered into.
Facts: A entered into a sub-lease contract with B. After the
contract was entered into, B represented to A that he (B) was a
partner of C.
Issue: Can B be held liable as a partner by estoppel of C?
Held: No. A did not enter into the sub-lease contract on the
basis of representation on the part of B that he was a partner
of C. In other words, for partnership by estoppel to exist, the
holding out of a person who is charged as being a partner by
estoppel must have been made before the contract with the
199
200
PARTNERSHIP
Art. 1825
third person was entered into and the third person must have
been induced into entering into said contract by reason of such
“holding out” of the partner by estoppel. (Peralta vs. Manalang,
9 C.A. Rep. 397.)
(8) Application of estoppel as between partners. — The doctrine of
estoppel has no application as between actual partners. Partners
become such by agreement and not by estoppel. (No. 6.) It is true
that a single partner or one or more partners in a partnership
may become liable to third persons beyond the limits fixed by
the partnership agreement by holding out as partners to an
extent greater than that specified in the partnership agreement.
As between the partners, such an action might be the basis for
a dissolution of the partnership but it would apply primarily
to third persons who had acted on the representations to their
detriment. (Barrett & Seago, op. cit., pp. 46-47.)
(9) Application of estoppel as to third parties. — It is in this area
that the doctrine of estoppel has been applied. (No. 6.) A person
or persons is or are held to be liable as partners because of their
representing themselves to be such, or by allowing others with
their consent and knowledge, to so hold them out to be partners.
The law will not permit a denial of such representation where
third parties have in the exercise of reasonable diligence relied
thereon to their detriment. There is a dictum to the effect that the
holding out as a partner may have been so public and open that
the presumption is thus created that the third person did, in fact,
rely upon it. As to whether or not a person has held himself out
to be a partner or has permitted another to so hold him out is a
question of fact (Ibid., pp. 47-48.) to be determined by evidence;
so each case rests upon its own merits.
It is obvious, however, that no one can be charged as a partner
where the acts relied on for that purpose are neither his own acts,
nor acts of others authorized by or known to him. Even though
it were generally, supposed, believed, and understood that a
person is a “partner” in a concern, this would be insufficient
evidence to prove that he was a partner. (31 Words and Phrases
278.)
Art. 1825
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
201
The cases arising under Article 1825 must be distinguished
from the situation covered by the last paragraph of Article 1834
which is not, properly speaking, a situation where partnership
by estoppel results. It is rather a partnership liability which
continues for lack of proper termination. (Teller, op. cit., p. 141.)
(10) Applicability of general provisions on partnership. — If
the law recognizes a defectively organized partnership as de
facto as far as third persons are concerned, for purposes of its
de facto existence, it should have such attribute of a partnership
as domicile. Although it has no legal standing or juridical
personality, it is a partnership de facto and the general provisions
of the Civil Code applicable to all partnerships apply to it. The
domicile of such a partnership is at the place where it conducts
its business so that registration of a chattel mortgage therein is
valid in accordance with Section 4 of the Chattel Mortgage Law.
(Peralta vs. Manalang, supra.)
Elements to establish liability as a partner
on ground of estoppel.
The basic elements in connection with establishment of
liability as a partner if based on the doctrine of estoppel must
encompass:
(1) Proof by plaintiff that he was individually aware of the
defendant’s representations as to his being a partner or that such
representations were made by others and not denied or refuted
by the defendant;
(2) Reliance on such representations by the plaintiff; and
(3) Lack of any denial or refutation of the statements by the
defendant; such denial need not precede plaintiff’s acting thereon
if the denial was forthcoming promptly upon hearing of the
representations, and if, by prudence and diligence the plaintiff
might have learned of the truth or untruth of the representations.
Defendant need not be proved to be a man of financial ability.
Sole reliance is not a requisite with respect to dealings involving
the one representing or represented to be a partner. (Barrett &
Seago, op. cit., pp. 48-49.)
PARTNERSHIP
202
Art. 1825
Liability as general partners of persons
who assume to act as a corporation.
The Corporation Code (B.P. Blg. 68.) provides:
“Sec. 21. Corporation by estoppel. — All persons who assume
to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed to use as
a defense its lack of corporate personality. x x x .”
The law makes liable as general partners “all persons who
assume to act as a corporation” and may include persons who
attempt, but fail to form a corporation and who carry on business
under the corporate name. A de facto partnership among them
is created. (De Leon & De Leon, Jr., The Corporation Code of
the Phils. Annotated [2006 ed.], p. 206.) Only the active members
of the unsuccessfully attempted corporation should be liable as
general partners. Subscribers to stocks who take no part in the
supposed corporation are not personally liable.
ILLUSTRATIVE CASE:
Investors in a proposed corporation which was never incorporated
are being held liable for losses incurred by the person who induced
them to make contributions to the corporation the said person would
form.
Facts: Petitioner L, engaged in the airline business, as sole
proprietor, executed a contract with JDA for the purchase
of two (2) aircraft, with P, insurance company, as surety for
the balance of the purchase price. Respondents B, C, and M
contributed some funds used in the purchase, supposed to
be their contributions to a new corporation proposed by L to
expand his airline business. They executed two (2) indemnity
agreements in favor of P. L defaulted.
P, after paying JDA, filed a petition for the extrajudicial
foreclosure of the aircraft subject of a chattel mortgage executed
in its favor by L. Respondents filed a third party claim alleging
that they are co-owners of the aircraft. Subsequently, P filed an
Art. 1825
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
action for judicial foreclosure with an application for a writ of
preliminary attachment against respondents.
Issues:
(1) What legal rules govern the relationship among coinvestors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest?
(2) How are the losses to be treated in situations where
their contributions to the intended “corporation” were invested
not through the corporate form?
It is the theory of petitioner that as a result of the failure of
petitioner and respondents to incorporate, a de facto partnership
among them was created and that as a consequence of such a
relationship all must share in the losses and/or gains of the
venture in proportion to their contributions.
Held: (1) Where intention of parties was to form a corporation. —
“While it has been held that as between themselves the rights
of the stockholders in a defectively incorporated association
should be governed by the supposed charter and the laws
of the state relating thereto and not by the rules governing
partners, it is ordinarily held that persons who attempt, but
fail, to form a corporation and who carry on business under
the corporate name occupy the position of partners inter se.
Thus, where persons associate themselves together under
articles to purchase property to carry on a business, and
their organization is so defective as to come short of creating
a corporation within the statute, they become, in legal effect,
partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized.
(Smith vs. Schoodoc Pond Packing Co., 84 A. 268, 109 Me. 555;
Whipple vs. Parker, 29 Mich. 369.)
So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes,
and each conveyed land to the corporation, and two of them
contracted to pay a third the difference in the proportionate
value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the
associates in an action between them for an accounting, and
its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of
203
204
PARTNERSHIP
Art. 1826
the property contributed by each. (Shorb vs. Beaudry, 56 Ca.
446.)’’
(2) Where participation of a party was limited to subscribing
to proposed corporation. — “However, such a relation does not
necessarily exist, for ordinarily, persons cannot be made to
assume the relation of partners, as among themselves, when
their purpose is that no partnership shall exist, and it should be
implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in
a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so as
to be liable as such in an action for settlement of the alleged
partnership and contribution.
It has been held that a partnership relation between certain
stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to
make the former liable to contribute for payment of debts
illegally contracted by the latter. (Heald vs. Owen, 44 N.W. 210,
79 Iowa 23.)”
(3) Where party was fraudulently induced to subscribe to
proposed corporation. — “The record showed that L never had
any intention to form a corporation with the respondents
despite his representations to them, giving credence to the
cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the
petitioner reneged on their agreement.
Applying the principles of law cited to the facts of the
case, necessarily, no de facto partnership was created among
the parties which would entitle L to a reimbursement of the
supposed losses of the proposed corporation. L acted on his
own and not in behalf of his other would-be incorporators in
the transaction.” (Pioneer Insurance & Security Corporation vs.
Court of Appeals, 175 SCRA 668 [1989].)
ART. 1826. A person admitted as a partner into an
existing partnership is liable for all the obligations of
the partnership arising before his admission as though
he had been a partner when such obligations were in-
Art. 1826
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
205
curred, except that this liability shall be satisfied only
out of partnership property, unless there is a stipulation
to the contrary. (n)
Liability of incoming partner for
partnership obligations.
(1) Limited to his share in partnership property for existing obligations. — When a person is admitted as a partner into an existing
partnership, he is liable for all obligations existing at the time
of his admission as though he was already a partner when such
obligations were incurred. For such obligations, his liability is
limited to his share in the partnership property, unless there is
a stipulation to the contrary. It has been said that the credit of
a new member of a partnership does not enter into the consideration of the creditors of the old partnership, and it would be
manifestly unjust to hold the new partner liable unless he, by an
express or implied agreement, assumed the debts of the old firm.
(40 Am. Jur. 273.)
(2) Extends to his separate property for subsequent obligations. —
Those who were already partners at the time when the obligations
were incurred are liable with their separate property. (Art. 1816.)
For all the obligations accruing subsequent to the admission of
the new partner, all the partners are liable with their separate
properties. Such obligations may have been incurred by virtue of
a contract made before his admission. (see infra.)
Rights of existing and subsequent
creditors.
It, therefore, results that existing and subsequent creditors
have equal rights as against partnership property and separate
property of the previously existing members of the partnership
while only subsequent creditors have rights against the separate
estate of the newly admitted partner.
(1) Where business is continued. — Section 1826 should be read
in connection with Section 1840 which provides for liability of
persons continuing the business in certain cases.
206
PARTNERSHIP
Art. 1826
Both sections are based on the principle that where there
has been one continuous business the fact that a new partner
has been admitted to the partnership, or a partner ceased to be
connected with it, should not be allowed to cause, as before,
endless confusion as to the claims of the creditors on the property
employed in the business; but that all creditors of the partnership,
irrespective of the times when they became creditors and the
exact combinations of persons owning the business should have
equal rights in such property. The rule has solved one of the most
perplexing problems of partnership law. (Commissioners’ Note,
Uniform Laws Annotated, p. 27, cited in A. Padilla’s Civil Code,
Vol. IV, [1974], pp. 132-133.)
(2) Where incoming partner has assumed obligation of retiring
partner. — Suppose, an incoming partner has assumed the
obligation of the retiring partner as one of the terms of the contract
by which he is admitted into the firm, is he liable directly to the
old partnership creditors such that the latter has a right of action
against the incoming partner?
The answer is in the affirmative if the assumption was made
primarily to benefit the firm creditors. This situation is governed
by Article 1311 (par. 2.) of the Civil Code which states: “If a contract
should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor
upon a third person.”
(3) Reason for rule making the new partner liable. — The rule
making an incoming partner liable even for partnership obligations contracted before his admission cannot be considered harsh
for the new partner because he “partakes of the benefits of the
partnership property and an established business. He has every
means of obtaining full knowledge of the debts of the partnership and protecting himself because he may insist on the liquidation or settlement of existing partnership debts. On the other
hand, these means are not afforded the creditor.” (Ibid.)
Art. 1826
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
EXAMPLE:
A, B, and C are partners engaged in a drug store business.
Their contribution is P10,000.00 each. D is admitted as a new
partner with a contribution of P4,000.00. At the time of his
admission, the partnership has an outstanding obligation to E
in the amount of P40,000.00.
In this case, D is also liable to E for this obligation of
P40,000.00. Thus, if the assets of the partnership amount to
P34,000.00, the same will be exhausted thereby leaving a balance
of P6,000.00 for which only A, B, and C shall be liable jointly or
pro rata, out of their separate property. D is not personally liable
in the absence of an agreement.
However, if the obligation was incurred by the partnership
subsequent to the admission of D, there would be no difference
between old and new partners, as all of them shall be personally
liable pro rata or P1,500.00 each. (Art. 1816.) D is entitled to a
proportional reimbursement from A, B, and C the amount he
has paid in excess of his share of the liability as follows:
Shares of A, B, and C (10/34 of P6,000) = P1,764.70 each
Shares of D (4/34 of P6,000) = P705.88
So A, B and C are liable for P264.70 each to D for the excess
of P794.12, the difference between P1,500.00 and P705.88.
ILLUSTRATIVE CASE:
The contract of lease was executed by the partnership before the
admission of the new partner who claims that by reason thereof he is
not liable out of his separate property for rents accruing subsequently.
Facts: B, a bank, leased real property to a partnership.
Subsequently, on April 28, 1931, C was taken in as a partner
and the new partnership paid the rent up to March, 1932. An
action was brought by B to recover the rent claimed to be due
for the period commencing March 1, 1932, and ending January
25, 1933.
C claims that, as an incoming partner, his personal assets
cannot be reached in satisfaction of the judgment.
Issue: May C’s liability as an incoming partner be satisfied
by resort to his personal assets?
Held: Yes. (1) New partnership liable for other obligations.
— C contends that since the lease was executed before he
207
208
PARTNERSHIP
Art. 1826
became a partner, the obligation of the lease arose before his
admission and, therefore, his liability can only be satisfied out
of partnership property. The contention of C would be sound
if the only obligation of the partnership in this transaction was
one which arose prior to his admission to the firm.
(2) New partnership liable as lessee. — When C became a
member, the first partnership was, in legal theory, dissolved
and a new partnership came into being, composed of the old
members and C. This second partnership did not expressly
assume the obligations of the lease, but it occupied the premises.
Whether it was liable contractually on the lease is immaterial;
it became liable for rent as a tenant. Strangers coming in with
consent and occupying the premises would be liable; tenants
would be liable even if there were no lease at all; and this
second partnership and all its members were liable regardless
of any lack of assumption of the obligations of the lease.
(3) Lessee’s obligation is a continuing one. — C’s theory is
that he, as a member of the second partnership, may receive
the benefits of years of occupancy under the lease, but that his
personal assets cannot be reached in satisfaction of liability
therefor if the lease was executed before he became a member
of the partnership. Under the general law, the obligation
of tenant arising from the occupation of the premises is a
continuing one; that is, it arises and binds him continually
throughout the period of his occupation. The obligation on the
part of C first arose when the new partnership, of which he
was a member, occupied the premises as a tenant. It follows
that his obligation as a tenant arose after his admission to the
partnership. (Ellingson vs. Walsh, O’Connor & Barneson, 104 P. 2d
507 [Cal. 1940].)
Liability of outgoing partner/
incoming partner.
(1) Contract made before retirement or withdrawal. — Where a
partner gives notice of his retirement or withdrawal from the
partnership, he is freed from any liability on contracts entered
into thereafter, but his liability on existing incomplete contracts
continues. Thus, he is liable for goods sold and delivered after
his retirement or withdrawal and notice thereof, if the sale
Art. 1827
OBLIGATIONS OF THE PARTNERS
Obligations of the Partners with Regard to Third Persons
209
was pursuant to a contract made before such retirement or
withdrawal.
(2) Performance after admission of new partner. — In the
case of an incoming partner, he is not personally liable for the
existing partnership obligations unless there is a stipulation to
the contrary (see Art. 1840, par. 2.), but in a parallel situation
above, he is liable for goods delivered to the partnership after
his admission to it, where the goods so delivered are in the
performance of a contract made before his admission. The result
is that both the retiring and the incoming persons are liable for
the debt created by delivery of such goods. Thus, the creditor,
without further exertion, obtains two debtors where before he
had only one. (Teller, op. cit., pp. 110-111, citing Freeman vs.
Hutleg Sash & Door Co., 105 Tex. 550.)
ART. 1827. The creditors of the partnership shall be
preferred to those of each partner as regards the partnership property. Without prejudice to this right, the
private creditors of each partner may ask the attachment and public sale of the share of the latter in the
partnership assets. (n)
Preference of partnership creditors
in partnership property.
With respect to partnership assets, the partnership creditors
are entitled to priority of payment. (see Art. 1839[2, 3, 8].) This
rule is based upon the theory that the partnership, treated as a
legal entity distinct and separate from the members composing it
(Art. 1768.), should apply its property to the payment of its debts
in preference to the claim of any partner or his creditors.
The rule applies only in the event of the disposition of
partnership property among its creditors to pay partnership
debts. The partners may deal with partnership property in the
usual course of business as they see fit.
Both the partnership and the separate partners thereof may
be joined in the same action. But the private property of the
partners cannot be taken in payment of partnership debts until
PARTNERSHIP
210
Art. 1827
the common property of the concern is exhausted. (Viuda de
Chan vs. Peng, 53 Phil. 906 [1929].)
Remedy of private creditors
of a partner.
Without prejudice to the right to preference of partnership
creditors, the creditors of each partner may ask for the attachment
and public sale of the share of the latter in the partnership assets.
(Art. 1814.) Such share really belongs to the partner. (Art. 1812.)
The purchaser at the public sale does not become a partner.
(Arts. 1767, 1813.)
EXAMPLE:
A, B, and C are partners in a partnership known as X & Co.
They contributed equally to the partnership. As they have no
stipulation regarding the share of each partner in the profits,
they share equally in the partnership assets, namely: 1/3. After
a year of operation, the assets of the partnership amounted to
P40,000.00. It is indebted to D in the amount of P28,000.00. E is
a separate creditor of A for P6,000.00.
The different claims shall be settled as follows:
As partnership creditor is preferred, D shall be paid first
the amount of P28,000.00, thereby leaving the partnership
assets to only P12,000.00. Each partner shall, therefore, get only
P4,000.00 as his share in the assets. Hence, E can collect only
P4,000.00 from the assets of the partnership. His remedy is to
recover the balance of P2,000.00 from the private property of A.
(see Art. 1839[9].)
— oOo —
211
Chapter 3
DISSOLUTION AND WINDING UP
Sources of provisions.
“The provisions on ‘Dissolution and Winding Up’ (Arts.
1828-1842.) were adopted, with suitable modifications, from the
Uniform Partnership Act. It was considered advisable to do so
because these provisions are ample and comprehensive on the
subject, while the lone provision of the present Civil Code1 (Art.
1708.) that ‘The partition among the partners shall be governed
by the rules for the partition of inheritances, with regard to its
form as well as the obligations arising therefrom,’ is deemed
unsatisfactory there being no similarity between a partnership
and an inheritance.” (Report of the Code Commission, p. 149.)
ART. 1828. The dissolution of a partnership is the
change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (n)
Effects of change in membership
of a partnership.
(1) Dissolution of existing partnership and formation of a new
one. — Any change in the membership of a partnership, either
by the retirement or death of partner,2 or by the admission of
new members into the partnership, produces, technically, an
1
Old Civil Code.
“The acquisition of 82% of the partnership interest by new partners, coupled with
the retirement or withdrawal of the partners who had originally owned such 82% interest, was enough to constitute a new partnership.’’ (Yu vs. National Labor Relations Commission, 223 SCRA 75 [1993].)
2
211
212
PARTNERSHIP
Art. 1828
immediate dissolution of the existing partnership relation, and
the formation of a new one, although common business usage
speaks of the admission of a partner to a firm and regards the
firm as subsisting so long as the course of its business is not
materially interrupted.
(2) Transformation of all partners into incoming partners. —
Therefore, strictly and technically speaking, there is no such
thing as “incoming partner,” or “the admission of a person into
an existing firm.” All persons forming the new partnership upon
the admission of the new person into the business are “incoming
partners,” even though the same business had theretofore been
conducted by the others through the medium of partnership.3
(3) Continuance by remaining partners of partnership as before. —
A partnership is a contractual and fiduciary relation dependent
upon the personality of its members, and the withdrawal or
admission of a member changes so radically the contractual
rights and duties inter se as to produce essentially a new relation,
even though the parties contemplate no actual dissolution of the
firm and continue to carry on business under the original articles
of partnership and with the same account books. (40 Am. Jur.
267; see Art. 1840.)
In other words, the change in the relation of the partners will
dissolve the partnership but will not disturb the continuance by
the remaining partners or by the existing and new partners of the
business as before. (but see Art. 1814.)
Dissolution, winding up, and
termination defined.
A partnership, of course, does not last forever. When it ends,
it involves these three separate stages.
3
Note that the admission of a new partner into an existing partnership which has
the effect of dissolving the partnership (see Art. 1840[1].) is not “caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the
business.” This “change in the relation of the partners” causes the dissolution which, in
turn, results in the old partners ceasing to be associated in carrying on of the business of
the dissolved partnership, and if the business is continued without liquidation, a new
partnership comes into being composed of the old partners and the new partner. The
definition in Article 1825 is thus not broad enough to cover this kind of dissolution resulting from the admission of a new partner.
Art. 1829
DISSOLUTION AND WINDING UP
213
The above terms are often confused. As they are used:
(1) Dissolution is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying
on of the business. (Art. 1828.) It is that point in time when the
partners cease to carry on the business together. It represents the
demise of a partnership. (68 C.J.S. 842.) Thus, any time a partner
leaves the business, the partnership is dissolved.
(2) Winding up is the actual process of settling the business
or partnership affairs after dissolution, involving the collection
and distribution of partnership assets, payment of debts, and
determination of the value of each partner’s interest in the
partnership. It is the final step after dissolution in the termination
of the partnership.
(3) Termination is that point in time when all partnership
affairs are completely wound up and finally settled. It signifies
the end of the partnership life. It takes place after both dissolution
and winding up have occurred.
ART. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (n)
Effects of dissolution.
(1) Partnership not terminated. — The dissolution of a partnership must not be understood in the absolute and strict sense
so that at the termination of the object for which it was created
the partnership is extinguished. (Testate Estate of Mota vs. Serra,
47 Phil. 464 [1926].) Dissolution does not automatically result in
the termination of the legal personality of the partnership, or the
cessation of his business, nor the relations of the partners among
themselves who remain as co-partners until the partnership is
terminated.
(2) Partnership continues for a limited purpose. — After dissolution, a partnership is considered as maintaining a limited existence for the purpose of making good all outstanding engagements, of taking and settling all accounts, and collecting all the
property, means and assets of the partnership existing at the time
214
PARTNERSHIP
Art. 1830
of its dissolution for the benefit of all interested. (40 Am. Jur.,
p. 312.)
(3) Transaction of new business prohibited. — After dissolution,
the partnership as a business enterprise remains viable only for
the purpose of winding up its affairs. The principal significance of
dissolution is that thereafter, no new partnership business should
be undertaken, but affairs should be liquidated and distribution
made to those entitled to the partners’ interest. (Crane, op. cit., 394;
Testate Estate of Mota vs. Serra, supra.) Whether the remaining
partners may be allowed to continue the business or require to
terminate the business depends on the method and manner of
dissolution. (Art. 1830.)
It is only after winding up is accomplished that the existence
of the partnership is terminated. Thus, dissolution refers to the
change in partnership relation and not the actual cessation of the
partnership business. It is not necessarily followed by a winding
up of partnership affairs. (see Arts. 1837, 1840.)
Dissolution of a partnership must be distinguished from a
mere suspension in the conduct of its business or operations. (68
C.J.S. 842.)
ART. 1830. Dissolution is caused:
(1) Without violation of the agreement between the
partners:
(a) By the termination of the definite term or
particular undertaking specified in the agreement;
(b) By the express will of any partner, who must
act in good faith, when no definite term or particular
undertaking is specified;
(c) By the express will of all the partners who
have not assigned their interests or suffered them
to be charged for their separate debts, either before
or after the termination of any specified term or particular undertaking;
(d) By the expulsion of any partner from the
business bona fide in accordance with such a power
conferred by the agreement between the partners;
Art. 1830
DISSOLUTION AND WINDING UP
215
(2) In contravention of the agreement between the
partners, where the circumstances do not permit a dissolution under any other provision of this article, by
the express will of any partner at any time;
(3) By any event which makes it unlawful for the
business of the partnership to be carried on or for the
members to carry it on in partnership;
(4) When a specific thing, a partner had promised to
contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership
thereof, has only transferred to the partnership the use
or enjoyment of the same; but the partnership shall not
be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article.
(1700a and 1701a)
Causes of dissolution.
(1) Statutory enumeration exclusive. — Articles 1830 and 1831
(infra.) provide for the causes of dissolution. The events that
cause dissolution of a partnership may be divided into four (4)
categories: act of the parties not in violation of their agreement;
act of the parties in violation of their agreement; operation of
law; and court decree. Other causes are provided in Article 1840.
(a) Under Article 1830, extrajudicial dissolution may
be caused without violation of the agreement between the
partners (No. 1.) or in contravention of said agreement. (No.
2.) It may be voluntary when caused by the will of one or
more or all of the partners (Nos. 1 and 2.) or involuntary when
brought about independently of the will of the partners or by
operation of law. (Nos. 3, 4, 5, 6, 7, and 8.)
216
PARTNERSHIP
Art. 1830
The voluntary dissolution of partnership may be effected
extrajudicially (Nos. 1 to 7.) or judicially, that is, by decree
of court. (No. 8, in relation to Art. 1831.) It will be observed
that the causes provided in Article 1830 result in the automatic
dissolution of the partnership.
(b) In Article 1840, automatic dissolution also takes place
when a new partner is admitted or when a partner retires,
withdraws, or is expelled from the partnership.
(c) There is no automatic dissolution under Article 1831
which enumerates the grounds for the judicial dissolution of
the partnership. Article 1838 seems to recognize the right
of a partner entitled to rescind on the ground of fraud or
misrepresentation to ask for judicial dissolution. (see also
Art. 1831[6].)
(d) It has been held that the statutory enumeration of
the causes of dissolution precludes dissolution for any other
cause. (Kurtzon vs. Kurtzon, 90 N.E. 2d 245.)
Note that once a partnership is dissolved, the same partners
may form a new partnership to continue the business under the
same terms.
(2) Effect of sale or assignment by one partner of his entire interest
in the partnership to a third person. — It does not ipso facto bring
about the dissolution of the partnership.4 That it produces
dissolution may be inferred, however, from the definition of
dissolution under Article 1828. But the dissolution created in
such case is only technical, and not actual, i.e., only in the sense
that his connection with the partnership is terminated.
In practice, the Securities and Exchange Commission accepts
for registration amended articles of partnership together with
the deed of sale of the interest of the withdrawing partner. (see
SEC Opinion, June 29, 1960.)
4
See Article 1813. The assignment merely provides a ground for the other partners to
dissolve the partnership (Art. 1830[c].) or for the purchaser to petition for a judicial decree
of dissolution. (Art. 1831, par. 2.)
Art. 1830
DISSOLUTION AND WINDING UP
217
Dissolution effected without violation
of partnership agreement.
There are four ways by which a partnership may be dissolved
without violation of the partnership agreement:
(1) Termination of the definite term or particular undertaking. —
A partnership may be constituted for a fixed term or it may have
for its object a specific undertaking. (Arts. 1785, 1783.) After the
expiration of the term or particular undertaking, the partnership
is automatically dissolved without the partners extending the
said term or continuing the undertaking. (see Art. 1785.) The
dissolution of the partnership will be but in pursuance of the
agreement of the partners, which is the law between them. (Art.
1159.)
If after said expiration the partners continue the partnership
without making a new agreement, the firm becomes a partnership
at will. (see Art. 1785.)
(2) By the express will of any partner. — A partnership at will,
regardless of whether the business is profitable or unprofitable,
may be dissolved at any time by any partner without the consent
of his co-partners without breach of contract, provided, the said
partner acts in good faith. Here, each partner has both the power
and the right to terminate the relation at any time. If there is bad
faith, the dissolution is wrongful.
(a) The existence of good faith will absolve the partner
exercising the right to dissolve the partnership from liability
for damages which result to his co-partners by reason of his
action. (68 C.J.S. 844.)
In a case, where the withdrawal of a partner has been
spurred by “interpersonal conflict’’ among the partners, it
would not be right to let any of the partners remain in the
partnership under such an atmosphere of animosity and,
certainly, not against their will. Indeed, for as long as the
reason for withdrawal of a partner is not contrary to the
dictates of justice and fairness, nor for the purpose of unduly
causing harm and damage upon the partnership, bad faith
cannot be said to characterize the act. In the context used in
218
PARTNERSHIP
Art. 1830
the law, bad faith is no different from its normal concept of a
conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity. (Ortega vs. Court of
Appeals, 245 SCRA 529 [1995].)
(b) While the attendance of bad faith cannot prevent
the dissolution of a partnership, it can result in liability
for damages. (Ibid.) The guilty partner would be liable for
wrongful dissolution as provided in Article 1837.
(c) A violation of the partnership agreement by the
exclusion of a partner from participation in the management
of the business of the firm has been held to give the excluded
partner the right to declare the partnership dissolved. (68
C.J.S. 844.)
(d) The partner who breaks off the partnership with
an unfair design, or for selfish objects, discharges his copartners from all liabilities to him but he does not thereby
free himself from his obligations to them. When he quits the
partnership that he may buy for himself what the partnership
has a right to purchase, or that he may make a profit for his
own advantage and to their prejudice, he is answerable to the
partnership for the loss and damage; and so, if he quits at an
unreasonable time, which occasioned a deprivation of profit
to the partnership, it is but right that he should repair and
make good such loss. (Howell vs. Harvey, 39 Am. Dec. 37.)
(3) By the express will of all the partners. — No particular form of
agreement is necessary to dissolve a partnership by consent. Such
dissolution may be accomplished either by an express agreement
or by words and acts implying an intention to dissolve. (68 C.J.S.
847.)
(a) The agreement to dissolve the partnership before the
termination of the specified term or particular undertaking
must be unanimous. The majority alone cannot dissolve the
partnership without breach of contract.
(b) That the consent of the partners who have assigned
their interests or suffered them to be charged for their
separate debts (Art. 1814.) is not required to effect dissolution
Art. 1830
DISSOLUTION AND WINDING UP
219
without breach of the partnership agreement. They are not
given the right to have a voice or vote in the dissolution of
the partnership. (68 C.J.S. 847.) The remaining partners alone
may dissolve the partnership.
(4) By expulsion of any partner. — The expulsion has the effect
of decreasing the number of the partners, hence, the dissolution.
The expulsion must be made in good faith, and strictly in
accordance with the power conferred by the agreement between
the partners. This power may be vested in one partner exclusively.
The partner expelled in bad faith can claim damages.
Dissolution effected in contravention
of partnership agreement.
(1) Dissolution may be for any cause or reason. — Any partner
may cause the dissolution of the partnership at any time without
the consent of his co-partners for any reason which he deems
sufficient by expressly withdrawing therefrom even though the
partnership was entered into for a definite term or particular
undertaking. Dissolution of such a partnership is, however, a
contravention of the agreement.
(2) Legal effects of dissolution. — The withdrawing partner
is liable for damages for unjustified dissolution but in no case
can he be compelled to remain in the partnership. With his
withdrawal, the number of members is decreased; hence, its
dissolution. (Dojas vs. Maglana, 192 SCRA 110 [1990].) The legal
effects of this dissolution are laid down in Article 1837, par. 2,
Nos. 1, 2, and 3.
A partner guilty of wrongful dissolution is not given the right
to wind up partnership affairs. (Art. 1836.) But a minor cannot
be guilty of wrongful dissolution since he has the legal right to
avoid his contract.
(3) Power of dissolution always exists. — No person can be
compelled either to become a partner or to remain one. The
relation of partners is one of mutual agency. The agency is such
an intimate personal one that equity cannot enforce it even where
the agreement provides that the partnership shall continue for a
definite time. The right of a partner to dissolve is inseparably
Art. 1830
PARTNERSHIP
220
incident to every partnership and there can be no indissoluble
partnership. (see Barrett & Seago, op. cit., Vol. 2, pp. 469-470.)
Note that there is no such thing as an indissoluble partnership
only in the sense that there always exists the power, as opposed to
the right, of dissolution. (Collins vs. Lewis, 283 S.W. 2d 258 Tex.
[1955].) The doctrine of delectus personae allows the partners to
have the power, although not necessarily the right, to dissolve
the partnership. An unjustified dissolution by a partner can
subject him to a possible action for damages. (Tocao vs. Court of
Appeals, 342 SCRA 20 [2000].)
ILLUSTRATIVE CASES:
1. A partner questions the right of another to withdraw from
the partnership.
Facts: A brought an action for withdrawal of his capital
contribution from the partnership formed by him and B, which
would mean its dissolution because the partnership was for a
definite term.
Issue: In impugning A’s right to maintain the suit, B cited
Articles 1808 and 1830 and A’s alleged bad faith.
Held: Article 1808 only requires the capitalist partner (who
violates the prohibition against engaging for his own account
in any operation which is of the kind of business in which the
partnership is engaged) to bring to the common fund of the
partnership, profits he might have realized. (2nd par.) It does
not prevent him from withdrawing from the partnership. (Lee
Tee vs. Ching Chiong, [C.A.] No. 14712-R, July 7, 1958.)
________
________
________
2. The intention to dissolve the partnership is shown by acts
and words of the partners.
Facts: A and B formed a partnership to exploit a fishpond
and thereafter to divide it between them into two equal parts.
Succeeding events reveal the intent of both parties to terminate
the partnership by refusing to share the fishpond with the
other — in direct violation of the undertaking for which they
have established their partnership — which resolution they
articulated in letters to each other.
Issue: Should the partnership be considered dissolved?
Art. 1830
DISSOLUTION AND WINDING UP
221
Held: Yes. Both A and B must be deemed to have expressly
withdrawn from the partnership, thereby causing its dissolution
pursuant to Article 1830(2) which provides, inter alia, that
dissolution is caused “by the express will of any partner” at
any time. (Deluao vs. Casteel, 26 SCRA 475 [1968].)
Business becomes unlawful.
Dissolution may be caused involuntarily when a supervening
event makes the business itself of the partnership unlawful (e.g.,
a law makes the continuance of the business illegal; declaration
of war between countries of which the partners are respectively
citizens) or makes it unlawful for the partners to carry it on
together. A partnership must have a lawful object or purpose.
(see Art. 1770.) The partners, however, can change the nature
of their business and continue the partnership with the new
business.
EXAMPLE:
J is a partner in a law firm. Later on, J is appointed Judge of
the Regional Trial Court. Under the law, a Judge of the Regional
Trial Court is prohibited from engaging in the practice of law.
In this case, it would be unlawful for J to continue as a partner
in the law firm. His appointment dissolves the partnership of
which he is a member.
Contracts of partnership are necessarily dissolved by a
state of war between the countries where the respective parties
are citizens or where they become alien enemies, or by a civil
war, since in both cases commercial intercourse is rendered
unlawful between the partners belonging to opposing sides.
This rule is based upon consideration of public policy, and is
not affected by the intention of the parties. (see 40 Am. Jur. 307.)
Loss of specific thing.
This provision of Article 1830 refers only to specific things.
When the thing to be contributed is not specific, Articles 1786
(par. 1.) and 1788 shall govern.
(1) Loss before delivery. — If the specific thing to be contributed
by a partner is lost before delivery, the partnership is dissolved
222
PARTNERSHIP
Art. 1830
because there is no contribution inasmuch as the thing to be
contributed cannot be substituted with another. There is here a
failure of a partner to fulfill his part of the obligation.
(2) Loss after delivery. — If the loss occurred after the delivery
of the thing promised, then the partnership is not dissolved,
but it assumes the loss of the thing having acquired ownership
thereof. The partners may contribute additional capital to save
the venture. (see Art. 1791.)
(3) Loss where only use or enjoyment contributed. — If only the
use or enjoyment of the thing is contributed, the partner having
reserved the ownership thereof, the loss of the same before or
after delivery dissolves the partnership because in either case,
the partner cannot fulfill his undertaking to make available the
use of the specific thing contributed. Here, the partner bears the
loss and, therefore, he is considered in default with respect to his
contribution. (Art. 1795, par. 1.) Upon dissolution, the partners
may demand for an accounting and liquidation.
The mere failure by a partner to contribute his share of
capital pursuant to an agreement to form a partnership does not
prevent the existence of a firm. (see Art. 1786.) Such failure may
be waived by the other parties to the agreement. (68 C.J.S. 414.)
Death of any partner.
The deceased partner ceases to be associated in the carrying
of the business; hence, the ipso facto dissolution of the partnership
by his death by operation of law. The surviving partners have no
authority to continue the business except so far as is necessary to
wind up (see Art. 1836.) except as provided in Article 1833. (see
Art. 1840[3].)
(1) Status of partnership. — The subsequent legal status of
a partnership dissolved by the death of a partner is that of a
partnership in liquidation, and the only rights inherited by the
heirs are those resulting from the said liquidation in favor of the
deceased partner, and nothing more. Before this liquidation is
made, it is impossible to determine what rights or interests, if
any, the deceased partner had. (Bearneza vs. Dequilla, 43 Phil.
237 [1922].)
Art. 1830
DISSOLUTION AND WINDING UP
223
(2) Liquidation of its affairs. — The liquidation of its affairs
is by law entrusted to the surviving partners, or to liquidators
appointed by them and not to the administrator or executor of
the deceased partner. (Guidote vs. Borja, 53 Phil. 900 [1929]; Lota
vs. Tolentino, 90 Phil. 829 [1952].)
(3) Continuation of business without liquidation. — A clause in
the articles of co-partnership providing for the continuation of
the firm notwithstanding the death of one of the partners is legal.
(Goquiolay vs. Sycip, 108 Phil. 947 [1960].)
A view has been expressed that the death of one of the
partners does not ipso facto dissolve the partnership when, by
common agreement, the surviving partners and the heirs of
the deceased decide to continue, the said agreement being in
such case considered as a continuation of the original contract
of partnership.5 (Espiritu and Sibal, op. cit., p. 245, citing 11
Manresa 407-408.) In such a case, however, there is a dissolution
of the partnership without winding up, and a continuance of
the business of the dissolved partnership by a new partnership,
of which the surviving partners and the heirs of the deceased
or executors are the members becoming liable as the old to the
creditors of the firm. (see Art. 1840[3].)
It will be seen from the foregoing that it is possible to continue
a partnership (actually, a new one) after the death of a partner,
thereby increasing the usefulness of the partnership device, and
decreasing its disadvantage as compared with the corporate
firm. (see Teller, op. cit., p. 88.)
ILLUSTRATIVE CASE:
The widow of a deceased, who became the new partner in
accordance with the articles of partnership, sold partnership property
after she was authorized by the surviving partner to manage the affairs
of the partnership which was engaged in the real estate business.
5
Under the rules of the Securities and Exchange Commission, the heirs of a deceased
partner may be admitted as partners when so authorized by the articles of partnership.
To reflect the substitution, the articles must be amended; likewise, an affidavit of adjudication or extrajudicial partition of the estate of the deceased must be submitted. Under
the rules, only the heirs and not the estate may be admitted as a partner into the partnership before or after the settlement of the estate of the deceased partner. (SEC Opinion,
June 20, 1975.)
PARTNERSHIP
224
Art. 1830
Facts: A, a partner in a partnership engaged in the real
estate business, died. The articles of partnership expressly
stipulates that in the event of the death of any of the partners,
the firm shall not be dissolved but will have to be continued
and the deceased partner shall be represented by his heirs or
assignee in said partnership.
B, the widow of A, sought authority, and was authorized by
C, the surviving partner, to manage the partnership property.
Subsequently, B sold lands belonging to the partnership.
Now, C questions the validity of the sale, claiming that B
never became more than a limited partner, thus, incapacitated
by law to manage the affairs of the partnership.
Issues:
(1) Is B a general or a limited partner?
(2) Is the sale valid?
Held: (1) B is a general partner. — By seeking authority to
manage partnership property, B showed that she desired to
be considered a general partner. By authorizing B to manage
partnership property (which a limited partner could not
be authorized to do), C recognized her as such partner, and
is in estoppel to deny her position as a general partner with
authority to administer and alienate partnership property.
While the heir ordinarily becomes a limited partner for his own
protection, he may disregard it and instead elect to become a
general partner as B in this case did.
Furthermore, the contractual stipulation in the articles of
partnership contemplates that the heirs would become general
partners rather than limited partners. The partnership certainly
could not be continued if it were to be converted into a limited
partnership, since the difference between the two kinds of
association is fundamental (see Art. 1843, Chapter 4.); and
especially because the conversion into a limited association
would leave the heirs of the deceased partner without a share
in the management.
The stipulation, however, would not bind the heirs of the
deceased partner should they refuse to assume personal and
unlimited responsibility for the obligations of the firm.
(2) B had authority to sell the real estate of the firm. — When
the partnership business is to deal in real estate, i.e., to buy and
Art. 1830
DISSOLUTION AND WINDING UP
225
sell real estate, as in the present case, one partner has ample
authority as a general agent of the firm to enter into a contract
for the sale of real estate. It must also be remembered that
a third person has a right to presume that a general partner
dealing with partnership property in pursuance of partnership
purpose has the requisite authority from his co-partners.
(Goquiolay vs. Sycip, 9 SCRA 663 [1963], Resolution of Motion for
Reconsideration.)
Insolvency of any partner or of partnership.
The insolvency of the partner or of the partnership must be
adjudged by a court.6
(1) The insolvency of a partner subjects his interest in the
partnership to the right of his creditors (see Art. 1814.) and makes
it impossible for him to satisfy with his property partnership
obligations to its creditors in the event that partnership assets
have been exhausted. (see Art. 1816.) Thus, by his insolvency, its
credit is impaired. An insolvent partner has no authority to act
for the partnership nor the other partners to act for him. (Art.
1833.)
(2) The insolvency of the partnership renders its property in
the hands of the partners liable for the satisfaction of partnership
obligations resulting in their inability to continue the business,
which practically amounts to a dissolution.7 But the reconvey6
Sec. 32. As soon as an assignee is elected or appointed and qualified, the clerk of
the court shall, by an instrument under his hand and seal of the court, assign and convey
to the assignee all the real and personal property, estate, and effects of the debtor with
all his deed, books, and papers relating thereto, and such assignment shall relate back
to the commencement of the proceedings in insolvency, and shall relate back to the acts
upon which the adjudication was founded, and by operation of law shall vest the title to
all such property, estate, and effects in the assignee, although the same is then attached
on mesne process, as the property of the debtor. Such assignment shall operate to vest in
the assignee all of the estate of the insolvent debtor not exempt by law from execution.
It shall also dissolve any attachment levied within one month next preceding the commencement of the insolvency proceedings and vacate and set aside any judgment entered
in any action commenced within thirty days immediately prior to the commencement
of insolvency proceedings and shall vacate and set aside any execution issued thereon
and shall vacate and set aside any judgment entered by default or consent of the debtor
within thirty days immediately prior to the commencement of the insolvency proceedings. (Act No. 1956, otherwise known as The Insolvency Law.)
7
“Sec. 51. A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged insolvent,
226
PARTNERSHIP
Art. 1830
ance by the assignee of the properties of the partnership pursuant to an order of the court after the termination of insolvency
proceedings involving the partnership has the effect of restoring
the partnership to its status quo. (Ng Cho Cio vs. Ng Diong, 1
SCRA 275 [1961].)
Civil interdiction of any partner.
A partnership requires the capacity of the partners. A person
under civil interdiction (or civil death) cannot validly give
consent (Art. 1327.), as his capacity to act is limited thereby. (Art.
38.)
Civil interdiction deprives the offender during the time of
his sentence of the right to manage his property and dispose
of such property by any act or any conveyance inter vivos. (Art.
either on the petition of the partners, or any of them, or on the petition of three or more
creditors of the partnership, qualified as provided in Section twenty of this Act, in either
of which cases the court shall issue an order in the manner provided by this Act upon
which all the property of the partnership, and also all the separate property of each of the
partners, if they are liable, shall be taken, excepting such parts thereof as may be exempt
by law; and all creditors of the partnership, and the separate creditors of each partner,
shall be allowed to prove their respective claims; and the assignee shall be chosen by
the creditors of the partnership and shall also keep separate accounts of the property of
the partnership, and of the separate estate of each member thereof. The expenses of the
proceedings shall be paid from the partnership property and the individual property of
the partners in such proportions as the court shall determine. The net proceeds of the
partnership property shall be appropriated to the payment of the partnership debts and
the net proceeds of the individual estate of each partner shall be applied to the payment
of his individual debts. Should any surplus remain of the property of any partner after
paying his individual debts, such surplus shall be added to the partnership assets and
be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to
the assets of the individual partners in the proportion of their respective interests in the
partnership. Certificate of discharge shall be granted or refused to each partner as the
same would or ought to be if the proceedings had been by or against him alone under
this Act; and in all other respects the proceedings as to the partners shall be conducted
in like manner as if they had been commenced and prosecuted by or against one person
alone. If such partners reside in different provinces, the court in which the petition is first
filed shall retain exclusive jurisdiction over the case. If the petition be filed by less than all
the partners of a partnership, those partners who do not join the petition shall be ordered
to show cause why they, as individuals, and said partnership, should not be adjudged
to be insolvent, in the same manner as other debtors are required to show cause upon a
creditor’s petition, as in this Act provided; and no order of adjudication shall be made in
said proceedings until after the hearing of said order to show cause.” (Act No. 1956, as
amended [The Insolvency Law].) (Ibid.)
Art. 1831
DISSOLUTION AND WINDING UP
227
34, Revised Penal Code.) Surely, one who is without capacity
to manage his own property should not be allowed to manage
partnership property.
Right to expel a partner.
In the absence of an express agreement to that effect, there
exists no right or power of any member, or even a majority of the
members, to expel all other members of the firm at will. Nor can
they at will forfeit the share or interest of a member or members
and compel him or them to quit the firm, even paying what is
due him. (40 Am. Jur. 211.)
(1) Partner guilty of extreme and gross faults. — Mere derelictions of a member, such as failure to pay his part of the expenses
or to promptly and faithfully perform his part of the services
agreed to, do not ipso facto forfeit his right, or even authorize a
court to forfeit his right, to the common property or assets of the
partnership. There may be, however, extreme and gross faults
which would work a forfeiture, especially where there was an extreme emergency for him to perform his duty, and to be prompt
and faithful. (Ibid.)
(2) Industrial partner engaging in business for himself. — The
law authorizes the capitalist partners to exclude from the firm an
industrial partner who engages in business for himself without
the express permission of the partnership. (Art. 1789.)
(3) Power expressly given by agreement. — A power of
expulsion of a partner may be expressly given by agreement.
The power is not validly exercised if it is shown to have been
exercised unfairly and without regard to the general interest of
the partnership. In theory, such power must be understood to
exist not for the benefit of any particular parties holding control
of firm membership, but for the benefit of the whole partnership.
Therefore, it cannot be exercised merely to enable the continuing
partners to appropriate to themselves the share of the expelled
partner at a fixed value less than the true value. (40 Am. Jur. 211.)
ART. 1831. On application by or for a partner, the
court shall decree a dissolution whenever:
228
PARTNERSHIP
Art. 1831
(1) A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable
of performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as
tends to affect prejudicially the carrying on of the business;
(4) A partner willfully or persistently commits a
breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership
business that it is not reasonably practicable to carry on
the business in partnership with him;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner’s
interest under Article 1813 or 1814:
(1) After the termination of the specified term or
particular undertaking;
(2) At any time if the partnership was a partnership at will when the interest was assigned or when the
charging order was issued. (n)
Judicial determination as to dissolution.
Events which make it impossible to carry on the business
as intended may have such serious effect that the partnership
ought to be dissolved by decree of the court. Such events as
unlawfulness, death, or insolvency of a partner are certain
and unequivocal. Their occurrence and effect is not a matter of
dispute or doubt.
On the other hand, the facts may be so far open to dispute or
difference of opinion as to make a necessary judicial determination
as to dissolution rather than allow them to be the occasion for
Art. 1831
DISSOLUTION AND WINDING UP
229
automatic dissolution by operation of law. Among the facts or
acts which will warrant a dissolution by judicial decree are those
enumerated in the first paragraph of Article 1831. (Crane, op. cit.,
pp. 409-410.)
Grounds for dissolution by decree
of court.
Dissolution of a partnership may be decreed judicially on
application, either (1) by a partner in the cases mentioned in
paragraph 1, Nos. 1-6; or (2) by the purchaser or assignee of a
partner’s interest under paragraph 2, Nos. 1 and 2.
(1) On application by a partner:
(a) Insanity. — The partner may have been previously
declared insane in a judicial proceeding; otherwise, the fact
of his being of unsound mind must be duly proved. An
insane person is incapacitated to enter into a contract. (Art.
1327[2].) The insanity must materially affect the capacity of
the partner to perform his contractual duties as a partner.
(b) Incapacity. — Obviously, this refers to incapacity
other than insanity. Independent of any express stipulation,
a partner impliedly undertakes to advance the success of the
partnership of which he is a member by devoting to it, within
reasonable limits, his time, effort, and ability. His co-partners
are entitled to his contribution and if, for any reason, he fails
to fulfill his duties they are thereby deprived, in greater or less
degree, according to the extent of his failure, of the benefits of
the contract which they have made, and of the fruits thereof
to which they are legitimately entitled. Hence, the rule that
courts have the power to decree dissolution of a partnership
because of incapacity of a partner which materially affects
his ability to discharge the duties imposed by his partnership
contract. (Barclay vs. Barrie, 102 N.E. 102.)
However, it is not the mere fact of the existence of insanity,
infirmity, or other disability supervening that will justify a
court to decree a dissolution. The incapacity contemplated by
law is incapacity which is lasting, from which the prospect of
recovery is remote. If the disability be of a temporary nature,
230
PARTNERSHIP
Art. 1831
if it be merely an occasional malady or accidental illness, if
there be a fair prospect of recovery within a reasonable time,
then, and in such cases, there is no fit ground to decree a
dissolution, for every partnership must be presumed to be
entered into, subject to the common incidents of life such as
temporary illness, infirmity, or insanity. (Ibid., citing Story on
Partnership, Sec. 297.)
(c) Misconduct and persistent breach of partnership agreement. — Like incapacity, conduct prejudicial to the carrying
on of the business (e.g., inveterate drunkenness) and persistent breach of the partnership agreement (e.g., keeping and
rendering false accounts, misuse or misappropriation of
partnership funds) are grounds for judicial dissolution, for
they defeat and materially affect and obstruct the purpose of
the partnership.
Temporary grievances, discourtesies, disagreements, or
mistakes of judgments that involve no permanent mischief
or injury will not suffice as the basis for a judicial decree of
dissolution.
But courts may order the dissolution of a partnership
where the quarrels and disagreements are of such a nature
and to such extent that all confidence and cooperation
between the parties have been destroyed, or where one of
the parties, by his misbehaviour, materially hinders a proper
conduct of the partnership business. It is not only large affairs
which produce trouble. The continuance of overbearing and
vexatious petty treatment of one partner by another frequently
is more serious in its disruptive character than would be
larger differences which would be discussed and settled.
For the purpose of demonstrating his own preeminence in
the business, one partner cannot constantly minimize and
depreciate the importance of the other without undermining
the basic status upon which a successful partnership rests.
(Owen vs. Owen, 119 P. 2d 713.)
Where a partner is guilty of serious misconduct, the only
remedy ordinarily available to co-partners is to apply to the
court for dissolution. But the partnership agreement may
Art. 1831
DISSOLUTION AND WINDING UP
231
expressly confer the power to expel a partner under specified
conditions. (see Art. 1830[1, d].) When this power is exercised
in good faith, it causes dissolution (without violation of the
partnership agreement) although no suit has been instituted
to that end. (Babb & Martin, op. cit., pp. 259-260.)
(d) Business can be carried on only at a loss. — Since the
purpose of a partnership is the carrying of a business for
profit, it may be dissolved by decree of court when it becomes
apparent that it is unprofitable with no reasonable prospects
of success.
Where a partnership had lost all its capital, or had
become insolvent, or that the enterprise for which it had
been organized had been concluded or utterly abandoned,
a provision in the articles of partnership prohibiting the
dissolution of the partnership except by the consent and
agreement of two-thirds of its partners, can in no wise limit
or restrict the right of a less number of the partners to effect a
dissolution of the partnership through judicial intervention or
otherwise. It would be absurd and unreasonable to hold that
such an association could never be dissolved and liquidated
without the consent and agreement of two-thirds of all the
partners. (Lichauco vs. Lichauco, 33 Phil. 350 [1916].)
A court is authorized to decree a dissolution notwithstanding that the partnership has been making profits where
it appears at the time of the application that the business can
only be carried on at a loss.
(e) Other circumstances. — Examples of circumstances
which render a dissolution equitable are abandonment of the
business, fraud in the management of the business, refusal
without justifiable cause to render accounting of partnership
affairs, etc. In a case, it was held that the sale of all real
property (lots) of a partnership did not work the dissolution
of the firm which was left without the real property it
originally had because the firm was not organized to exploit
the lots sold but to engage in buying and selling real estate,
and “in general real estate agency, and brokerage business.”
(Goquiolay vs. Sycip, 108 Phil. 984 [1960].)
PARTNERSHIP
232
Art. 1831
ILLUSTRATIVE CASE:
In an action for damages against the managing partner by reason
of fraudulent administration, liquidation is not prayed for.
Facts: A filed a complaint against B for damages allegedly
suffered by him by reason of the fraudulent administration by
B of a partnership of which A, B, and C are members. It is not
alleged in the complaint that a liquidation of the partnership
has been effected nor is it prayed that it be made.
Issue: Is there reason or cause for A to institute the action
which he claims from the managing partner B?
Held: None. The complaint of A does not contain sufficient
facts to constitute a cause of action. For the purpose of
adjudicating to A damages which he alleges to have suffered
as a partner as a result of the fraudulent management of the
partnership, it is first necessary that a liquidation of the business
thereof be made to the end that the profits and losses may be
known, and the causes of the latter and the responsibility of the
managing partner, as well as the damages which each partner
may have suffered, may be determined. (Soncuya vs. De Luna,
67 Phil. 646 [1939].)
(2) On application by a purchaser of a partner’s interest. — In
either of the two cases mentioned in the last paragraph, a
purchaser of a partner’s interest under Article 1813 or 1814 may
apply for judicial dissolution of a partnership.
EXAMPLES:
(1) A, B, and C formed a partnership to continue for a term
of five (5) years. On the third year, C sold his entire interest
to D. Under Article 1813, such conveyance does not dissolve
the partnership, and D does not become a partner, his only
right being to receive the profits to which C would otherwise
be entitled. Hence, D cannot ask for judicial dissolution of the
partnership.
However, if after the fifth year, the partnership is continued,
D is entitled to ask for judicial dissolution. The partnership as
continued may or may not be a partnership at will.
(2) Suppose now, after the fifth year, the partnership was
continued by the partners without any express agreement,
becoming a partnership at will. (see Art. 1785.) If C’s interest
Art. 1832
DISSOLUTION AND WINDING UP
233
was purchased by D or a charging order was issued against
C in favor of D, his judgment creditor, as provided in Article
1814, when the partnership was already a partnership at will,
D, at any time, may ask for judicial dissolution.
Note that the rule in Article 1831 (par. 2[2].) applies only if
in continuing the business, a partnership at will is created, or
the partnership is a partnership at will from the beginning.
ART. 1832. Except so far as may be necessary to
wind up partnership affairs or to complete transactions
begun but not then finished, dissolution terminates all
authority of any partner to act for the partnership.
(1) With respect to the partners:
(a) When the dissolution is not by the act, insolvency or death of a partner; or
(b) When the dissolution is by such act, insolvency or death of a partner, in cases where Article
1833 so requires;
(2) With respect to persons not partners, as declared
in article 1834. (n)
Effect of dissolution on authority
of partner.
(1) General rule. — Unless otherwise stipulated, every partner
is considered the agent of the partnership with authority to bind
the partnership as well as the other partners with respect to the
transaction of its business. (Art. 1803.) Upon dissolution, the
partnership ceases to be a going concern and the partner’s power
of representation is confined only to acts incident to winding up
or completing transactions begun but not then finished.
The event of dissolution, therefore, terminates the actual authority of a partner to undertake new business for the partnership.
(2) Qualifications to the rule. — The foregoing, however, is
a general rule that is subject to the qualifications set forth in
Articles 1833 and 1834 in relation to Article 1832.
PARTNERSHIP
234
Art. 1833
(a) In so far as the partners themselves are concerned, the
authority of any partner to bind the partnership by a new
contract is immediately terminated when the dissolution is
not by the act, insolvency, or death of a partner. (Art. 1832.)
When the dissolution is by such act, insolvency, or death,
the termination of authority depends upon whether or not
the partner had knowledge or notice of the dissolution as
provided in Article 1833.
(b) With respect to third persons (Art. 1834.), the partnership
is generally bound by the new contract although the authority
of the acting partner as it affects his co-partners is already
deemed terminated under Articles 1832 and 1833. In such a
case, however, the innocent partners can always recover from
the acting partner.
EXAMPLE:
A, B, and C were partners in X & Co. The term of existence
of the partnership as fixed in the articles of partnership expired
yesterday. Therefore, it was dissolved. Here, the dissolution
was caused not by the act, insolvency, or death of a partner.
If today A enters into a new transaction (not necessarily
for winding up or to complete a transaction begun but not
yet finished) with D, he (A) alone assumes whatever liability
may arise under the contract because his authority to act
for the partnership X & Co. as to bind B and C terminated
as of yesterday, when the partnership was dissolved. If the
partnership is liable to D under Article 1834, B and C are
entitled to indemnity from A.
ART. 1833. Where the dissolution is caused by the
act, death or insolvency of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the
partnership had not been dissolved unless:
(1) The dissolution being by act of any partner, the
partner acting for the partnership had knowledge of the
dissolution; or
Art. 1833
DISSOLUTION AND WINDING UP
235
(2) The dissolution being by the death or insolvency of a partner, the partner acting for the partnership
had knowledge or notice of the death or insolvency.
Right of partner to contribution
from co-partners.
The above article speaks of dissolution caused by the act,
insolvency, or death of a partner.
Where a partner enters into a new contract with a third
person after dissolution, the new contract generally will bind the
partners. (Art. 1834, par. 1.) Each of them is liable for his share
of any liability created by the acting partner as if the partnership
had not been dissolved.
Authority of partners inter se to act
for the partnership.
The authority of a partner as it affects his co-partners (not
third persons) is not deemed terminated except in two instances,
namely:
(1) The cause of the dissolution is the act of a partner and the
acting partner had knowledge of such dissolution; and
(2) The cause of the dissolution is the death or insolvency of
a partner and the acting partner had knowledge or notice of the
death or insolvency.
The rule in No. 1 is designed to protect the remaining partner
or partners who might continue to act for the partnership as a
going concern, not having actual knowledge of the dissolution.
The rule in No. 2 discards the fiction that everybody is presumed
to have knowledge of death or insolvency.
Knowledge or notice of cause
of dissolution.
(1) Dissolution by death or insolvency. — Under Article 1833, the
authority of a partner to act for the partnership may still continue
notwithstanding its dissolution. In the case of death, to hold that
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PARTNERSHIP
Art. 1833
a partner acting for the partnership bona fide in ignorance of the
death or his co-partners must assume the entire liability, even
though all other partners are ignorant of the death of the partner,
and even though such deceased partner was entirely inactive
and may have resided at any distance from the actual place of
business, is entirely unjust to the acting partner or partners.
What has been said of the death of a partner applies also to
the bankruptcy of a partner.8 If there are a number of partners,
and one of them becomes bankrupt, and another having no
knowledge or notice of this fact makes a contract in the ordinary
course of the business, there appears no reason why he should not
be able to call on his other partners, not bankrupt or deceased, to
contribute towards any loss which his separate estate may sustain
on account of the contract. (7 Unif. L. Ann. 191-192 [1949].)
(2) Dissolution by court decree or resulting from unlawfulness.
— No substantial problem exists where dissolution is brought
about, for example, by court decree, since this brings actual
notice of the dissolution to all of the partners nor is a problem
presented where dissolution results from unlawfulness, since the
general rules governing actions arising out of illegal transactions
would control in such cases. (Teller, op. cit., p. 101.)
When a partner has knowledge
or notice of a fact.
The Uniform Partnership Act defines the two terms as
follows:
(1) “A person has knowledge of a fact within the meaning of
this Act not only when he has actual knowledge thereof, but also
when he has knowledge of such other facts as in the circumstances
show bad faith.”
8
In common law, dissolution of a firm by death or bankruptcy of one of the partners
puts an end to the liability of the estate of such dead or bankrupt partner, and any new
contract entered into by the survivor in the firm bind only the survivor. This result was
followed even though the other or surviving partners were ignorant of the death or bankruptcy unless, of course, the contract was entered into for the purpose and within the
scope of dissolution. This was because the common law viewed death or bankruptcy as a
public and notorious act which acted as constructive notice. (Teller, op. cit., p. 102, citing
Marlett vs. Jackson, 85 Mass. 287.)
Art. 1833
DISSOLUTION AND WINDING UP
237
(2) “A person has notice of a fact9 within the meaning of this
Act when the person who claims the benefit of the notice:
(a) States the fact to such person, or
(b) Delivers through the mail or by other means of
communication, a written statement of the fact to such person
or to a proper person at his place of business or residence.”
(Sec. 3, U.P.A.)
EXAMPLES:
(1) A, B, and C were partners. A informed B that the
former was resigning or withdrawing from the partnership.
The partnership was thus dissolved by the act of A.
C had no knowledge of the dissolution. If partnership
liability is incurred by a contract entered into by C, A and B
are bound to contribute their share of the liability as if the
partnership had not been dissolved. To avoid being liable for
his share of partnership liability arising after the dissolution, A
should prove knowledge on the part of C that A had already
dissolved the partnership at the time the contract was made.
If the contract was entered into by B despite his knowledge
of the dissolution, A and C can recover from B. In the end,
only B will assume the entire liability. Suppose B learned of
the resignation of A only from C. In this case, B had merely
notice (as distinguished from knowledge) of the dissolution.
Hence, A and C can be called upon to contribute their share in
the liability.
(2) If A had died or had become insolvent, knowledge or
notice on the part of B will justify non-liability on the part of
the other partners.
It must be noted that Article 1833 applies only if the contract
of the partner binds the partnership. If the partnership is not
bound (Art. 1834, par. 4.), only the acting partner is personally
liable.
9
Under the Negotiable Instruments Law, “where the parties to be notified are partners, notice to any partner is notice to the firm, even though there has been a dissolution.’’
(Sec. 99, Act No. 2031.)
238
PARTNERSHIP
Art. 1834
ART. 1834. After dissolution, a partner can bind the
partnership, except as provided in the third paragraph
of this article:
(1) By an act appropriate for winding up partnership affairs or completing transactions unfinished at
dissolution;
(2) By any transaction which would bind the partnership if dissolution had not taken place, provided the
other party to the transaction:
(a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the dissolution; or
(b) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution,
and having no knowledge or notice of dissolution, the
fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if
more than one) at which the partnership was regularly
carried on.
The liability of a partner under the first paragraph,
No. 2, shall be satisfied out of partnership assets alone
when such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom
the contract is made; and
(2) So far unknown and inactive in partnership affairs that the business reputation of the partnership
could not be said to have been in any degree due to his
connection with it.
The partnership is in no case bound by any act of a
partner after dissolution:
(1) Where the partnership is dissolved because it is
unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or
(2) Where the partner has become insolvent; or
Art. 1834
DISSOLUTION AND WINDING UP
239
(3) Where the partner had no authority to wind up
partnership affairs, except by a transaction with one
who —
(a) Had extended credit to the partnership prior
to dissolution and had no knowledge or notice of
his want of authority; or
(b) Had not extended credit to the partnership
prior to dissolution, and, having no knowledge or
notice of his want of authority, the fact of his want
of authority has not been advertised in the manner
provided for advertising the fact of dissolution in
the first paragraph, No. 2(b).
Nothing in this article shall affect the liability under article 1825 of any person who after dissolution
represents himself or consents to another representing
him as a partner in a partnership engaged in carrying
on business. (n)
Power of partner to bind dissolved
partnership to third persons.
Article 1834 enumerates the cases when a partner continues
to bind the partnership even after dissolution (par. 1, Nos. 1
and 2.) and the case when he cannot bind the partnership after
dissolution. (par. 3, Nos. 1, 2, and 3.)
(1) Where there is no notice to third persons of dissolution. —
Upon the dissolution of the partnership, as between themselves,
the power of one partner to act and bind the others is effectively
terminated. (Arts. 1832, 1833.) But the authority of a partner may
apparently continue as regards third persons on the assumption
that the partnership is still existing. Since a partnership
once established is, in the absence of anything to indicate its
termination, presumed to exist, the law, for the protection of
innocent third persons, imposes upon partners the duty of giving
notice of the dissolution of the partnership.
(2) Where there is actual or constructive knowledge by third
persons of dissolution. — The measure of the right of third persons
PARTNERSHIP
240
Art. 1834
who continue to deal with a dissolved partnership depends upon
the question of whether they knew or should have known of the
fact of dissolution. If they did, the validity of their transactions
is governed by the question whether those transactions were
necessary to liquidate the partnership affairs. (Teller, op. cit., p.
102.)
EXAMPLES:
Where A, B, and C are active and ostensible partners,
A’s retirement terminates the actual authority of A, B, or C
to impose new obligations on the partnership, except such
as may be necessary to wind up the business or to complete
transactions begun but not then finished.
Assume that D has extended credit to the partnership prior
to A’s retirement, and has no knowledge of A’s retirement, and
that no notice thereof has been communicated to X, by mail or
otherwise, then on the ground of estoppel:
(1) If B or C, purporting to act on behalf of the partnership,
contracts with D (e.g., orders goods), the partnership (A, B, and
C, jointly) is liable to D.
(2) If A, purporting to act on behalf of the partnership,
contracts with D, the partnership (A, B, and C, jointly) is liable
to D. (Babb & Martin, op. cit., pp. 262-263.)
Notice of dissolution to creditors.
(1) As to persons who extended credit to partnership prior to
dissolution. — Customers of the partnership or persons who
extended credit to the partnership prior to its dissolution must
have knowledge or notice of the dissolution to relieve the
partnership from liability.
(2) As to persons who had known of partnership’s existence. — As
to persons who had not so extended credit prior to its dissolution,
but who had known of its existence, the fact that the dissolution
had been published in the newspaper would be sufficient (par. 1,
No. 2[a, b].), even if they did not actually read the advertisement.
(3) Where acting partner has no authority to wind up partnership
affairs. — Under the third paragraph, notice of dissolution
is unnecessary except in case No. 3, where the partner has no
Art. 1834
DISSOLUTION AND WINDING UP
241
authority to wind up partnership affairs. Third persons dealing
with the partner without such authority are protected under the
same circumstances mentioned in paragraph 1, No. (2)(a) and
(b).
(4) Where acting partner has become insolvent. — As to insolvency,
the law makes a distinction between the right of a partner who
has no knowledge or notice of the other partner’s insolvency
to bind the partnership and the right of a third person to claim
that his contract with the partnership is valid, notwithstanding
its dissolution through insolvency of the partner with whom the
contract was made.
The former is recognized under Article 1833(2), while the
latter is denied under Article 1834 (par. 3, No. 2.), i.e., the innocent
partner is protected in his continued right to make binding
partnership agreements, but no similar protection is extended to
a third party who innocently makes a contract with an insolvent
partner because it is incumbent upon him to know the status of
the insolvent partner.
(5) Where dissolution caused by death of a partner. — As to death,
no such distinction is made, largely because the deceased partner
no longer exists. Death, then, is not considered to be notice per se
whether as to the surviving partner or as to third persons. (Teller,
op. cit., pp. 104, 108.)
Character of notice required.
The character of notice required to relieve a retiring partner
or the representatives of a deceased partner from subsequent
liability on partnership obligations varies in accordance with the
class of persons required to be notified.
(1) As to prior dealers. — Notice must be actual. Mere mailing
of a letter to a former dealer is insufficient to relieve the retiring
partner from subsequent liability, where the notice was never
received. Furthermore, there is no duty on the part of a prior
dealer to inquire into the question of retirement, even though
the prior dealer had the means of obtaining knowledge of such
retirement but failed to make use of it. So, it was held that a
prior dealer entitled as such to actual notice, may not be said as
PARTNERSHIP
242
Art. 1834
a matter of law to have received notice by reason merely of the
fact that the retirement was mentioned in a newspaper to which
the prior dealer subscribed, or although the fact of dissolution
was mentioned editorially in the local newspaper. (Teller, op. cit.,
p. 105, citing Austin vs. Holland, 69 N.Y. 571; Smart & Co. vs.
Breckinridge Bank, 28 Kg. L. 646; Zollar vs. Janorin, 47 N.H. 324;
Anglin vs. Marr Canning Co., 152 Ark 1.)
A prior or former dealer is one who has extended credit on
the faith of the partnership, through confidence in the solvency
and probity of the firm. Mere dealing with a firm on a cash basis
does not constitute one a prior dealer. One who purchases goods
from the supposed partnership is not a prior dealer. (Ibid., citing
Hokew vs. Silman, 95 Ga. 678.)
(2) As to all others. — Notice is accomplished by an
advertisement in a local newspaper. Actual notification is not
necessary. It should be noted, however, that the requirement of
newspaper notice appears to exist only where the third party
knew of the partnership prior to dissolution. If he did not, he is
entitled to no notice whatsoever. It is not clear whether notice
to others other than prior dealers, who had knowledge of the
partnership prior to dissolution, was sufficient if given in ways
other than by newspaper notification. Apparently, the law has
made newspaper notification an exclusive method for giving
notice. (Teller, op. cit., p. 106.)
EXAMPLE:
T purchased goods from a partnership. Thereafter, the
partnership was dissolved. Notice of the dissolution was
advertised in the local newspaper. Without knowledge of
the dissolution, T thereafter extended credit to the supposed
partnership at the request of one of its members in connection
with a transaction not necessary for the liquidation of the
business.
May T hold the partnership liable on the transaction?
No. Prior dealers must be given actual notice of the
dissolution of a partnership in order to prevent the continuance
of partnership liability. T, however, is not a prior dealer. Hence,
he is considered to have received notice as a matter of law when
Art. 1834
DISSOLUTION AND WINDING UP
243
the fact of dissolution was advertised in the local newspaper.
(Ibid., pp. 179-180, 187.)
ILLUSTRATIVE CASE:
A third person, without notice, extended credit to a partnership
after withdrawal of a partner and its continuation by the other
partners.
Facts: A withdrew from the partnership “Isabela Sawmill”
composed of A, B, and C. It does not appear that the withdrawal
of A from the partnership was published in the newspapers.
There was no liquidation of the partnership assets. On the
contrary, it was expressly stipulated in a memorandumagreement among A, B, and C that the remaining partners, B
and C, had constituted themselves as the partnership entity,
the “Isabela Sawmill.” B and C continued the business, using
the properties of the partnership.
To secure the obligations of B and C to A, B and C executed
a chattel mortgage over certain properties of the partnership
in favor of A who was issued a certificate of sale over the same
as a result of the judicial foreclosure of the mortgage. In the
meantime, X, etc. extended credit to the partnership.
Issue: Is A liable to X, etc. for the properties of the partnership
which were mortgaged to her and which she purchased at
public auction?
Held: Yes. The judicial foreclosure of the chattel mortgage
executed in favor of A did not relieve her from liability to the
creditors of the partnership. X, etc. and the public in general
had a right to expect that whatever credit they extended to B
and C doing the business in the name of the partnership could
be enforced against the properties of the partnership.
Although A acted in good faith, X, etc. also acted in good
faith in extending credit to the firm. Where one of two innocent
persons must suffer, the person who gave occasion for the
damages to be caused must bear the consequences. (Singson vs.
Isabela Sawmill, 88 SCRA 623 [1979].)
Dormant partner need not give
notice.
Under the second paragraph, the liability of a partner
unknown as such to the person with whom the contract is made
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PARTNERSHIP
Art. 1834
or so far unknown and inactive in partnership affairs shall be
satisfied out of partnership assets alone. This is a qualification
of the rule that partners are liable pro rata with all their property
after the assets of the partnership have been exhausted for
partnership obligations. (Art. 1816.)
A dormant partner is both inactive and secret. His connection
with the partnership not having known, it cannot in any degree
have contributed towards establishing its reputation or credit.
Third persons, not having dealt with the partnership in reliance
upon the membership of the dormant partner, are accordingly
not entitled to notice of his withdrawal. The principle of estoppel
cannot operate to continue his liability or his authority after
dissolution since prior thereto, he was never known or held out as
a partner. He will, of course, be personally liable for partnership
debts arising at the time of his retirement. (Babb and Martin, op.
cit., pp. 264-265.)
Partnership by estoppel
after dissolution.
Article 1834 (last par.) touches upon the subject of partnership
by estoppel (Art. 1825.), since a partnership is held to exist as to
third persons though it does not exist as a going concern so far as
the partners themselves are concerned. The situation differs from
a partnership by estoppel, however, in that a partnership did
once exist and liability is based upon its continuance as a matter
of law as far as third persons are concerned. A partnership by
estoppel involves a “holding out” by parties as partners when,
in fact, they are not partners.
Article 1825 deals with partnership by estoppel. It will
be seen that Article 1769(1) is not entirely accurate in stating
that “Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third persons,”
since this overlooks the circumstances under which by virtue of
Article 1834, third persons may claim the validity of contracts
made with dissolved partnerships in disregard of the fact of
dissolution. (Teller, op. cit., p. 103.)
Art. 1835
DISSOLUTION AND WINDING UP
245
ART. 1835. The dissolution of the partnership does
not of itself discharge the existing liability of any partner.
A partner is discharged from any existing liability
upon the dissolution of the partnership by an agreement to that effect between himself, the partnership
creditor and the person or partnership continuing the
business; and such agreement may be inferred from the
course of dealing between the creditor having knowledge of the dissolution and the person or partnership
continuing the business.
The individual property of a deceased partner shall
be liable for all obligations of the partnership incurred
while he was a partner, but subject to the prior payment
of his separate debts. (n)
Effect of dissolution on partner’s
existing liability.
The dissolution of a partnership does not of itself discharge
the existing liability of a partner. (Testate Estate of Mota vs. Serra,
47 Phil. 464 [1925].)
A partner may be relieved from all existing liabilities upon
dissolution only by an agreement to that effect between himself,
the partnership creditor, and the other partners. The consent,
however, of the creditor and the other partners to the novation
may be implied from their conduct.
Liability of estate of deceased
partner.
In accordance with Article 1816, the individual property
of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner. Note that the
individual creditors of the deceased partner are to be preferred
over partnership creditors with respect to the separate property
of said deceased partner. (Art. 1839[8].)
PARTNERSHIP
246
Art. 1836
EXAMPLE:
If A, B, and C are partners and A retires, all three (A, as well
as B and C) continue to be personally liable for partnership
debts existing at the time of A’s retirement.
Similarly, if A dies, his individual estate is available to
partnership creditors, subject, however, to the claims of A’s
personal creditors. Even an agreement among A, B, and
C whereby B and C promised to assume the partnership
debts does not release A, unless the creditors assent to such
substitution of debtors, either by express agreement (novation)
or by agreement inferable from course of dealing. (Babb and
Martin, op. cit., p. 262.)
ART. 1836. Unless otherwise agreed, the partners
who have not wrongfully dissolved the partnership or
the legal representative of the last surviving partner,
not insolvent, has the right to wind up the partnership
affairs, provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may
obtain winding up by the court. (n)
Manner of winding up.
The winding up of the dissolved partnership may be done
either:
(1) judicially, under the control and direction of the proper
court upon cause shown by any partner, his legal representative,
or his assignee; or
(2) extrajudicially, by the partners themselves without intervention of the court.
Nature of action for liquidation.
An action for the liquidation of a partnership is a personal
one; hence, it may be brought in the place of residence of either
the plaintiff or the defendant.
Thus, the fact that the plaintiff prays for the sale of the assets
of the partnership including a fishpond located in a province
other than that where the action was brought, does not change
Art. 1836
DISSOLUTION AND WINDING UP
247
the nature or character of the action, such sale being merely a
necessary incident to the liquidation of the partnership, which
should precede and/or is a part of its proper liquidation.
(Claridades vs. Mercader, 17 SCRA 1 [1966].)
Persons authorized to wind up.
(1) The following are authorized to wind up the affairs of the
partnership:
(a) The partners designated by the agreement;
(b) In the absence of such agreement, all the partners
who have not wrongfully dissolved the partnership; or
(c) The legal representative (executor or administrator) of
the last surviving partner (when all the partners are already
dead), not insolvent. (Art. 1830[6].)
(2) The court may, in its discretion, after considering all the
facts and circumstances of the particular case, appoint a receiver
to wind up the partnership affairs where such step is shown to
be to the best interests of all persons concerned. An insolvent
partner does not have the right to wind up partnership affairs.
(see Arts. 1830[6]; 1833.)
Survivor’s right and duty to liquidate.
When a member of a partnership dies, the duty of liquidating
its affairs devolves upon the surviving member or members of
the firm, not upon the legal representative of the deceased partner
(except when such partner was the last surviving partner). (Lota
vs. Tolentino, 90 Phil. 829 [1952]; Po Yeng Cheo vs. Lim Ka Yan,
44 Phil. 172 [1922]; Guidote vs. Borja, 53 Phil. 950 [1929].)
(1) The legal representative has no right to interfere with the
partnership business, so long as the surviving partner proceeds
in good faith to settle its affairs, and it makes no difference how
well qualified such representative may be to assist. The executor
or administrator of a deceased partner cannot insist on continuing
the business in the absence of some controlling agreement to that
effect. (40 Am. Jur. 333.)
248
PARTNERSHIP
Art. 1836
(2) Under the Uniform Partnership Act, “x x x a surviving
partner is entitled to reasonable compensation for his services
in winding up partnership affairs.” (Sec. 18[f] thereof.) Our
law is silent on this point. It is believed, however, that even in
the absence of agreement, the surviving partner or liquidating
partner is entitled to reasonable compensation in exceptional
situations as where the services rendered are extraordinary or
substantial in nature.
Powers of liquidating partner.
(1) Make new contracts. — For the purpose of winding up the
partnership, a liquidating partner is sole agent of the partnership,
but merely for that one specific purpose. Thus, without express
authorization, he cannot make new contracts or create new
liabilities, as by giving promissory notes binding on the firm nor
can he extend the time for the payment of existing obligations
to the firm, or make acknowledgments of the validity of claims
against the firm.
(2) Raise money to pay partnership debts. — For the purpose of
winding up the concern, however, the liquidating partner has
the same general power to bind the firm as he had before, and
he may bind the partnership by borrowing money to meet its
accruing liabilities, and may sell its real estate to raise money to
pay its debts. (40 Am. Jur. 325.)
(3) Incur obligations to complete existing contracts or preserve
partnership assets. — A liquidating partner has power to incur
obligations necessary to the completion of existing contracts, and
to incur debts or other obligations necessary for the reasonable
preservation of partnership assets or in procuring a favorable
market for their disposal. (40 Am. Jur. [1960] Supp. 36.)
(4) Incur expenses necessary in the conduct of litigation. — Where
a liquidating partner is confronted with the necessity of litigation
in order to perform his duty in winding up the affairs of the
partnership, he has power to employ an attorney, with resultant
obligations, to prosecute and defend the action or to incur other
expenses necessary in the conduct of such litigation. (Ibid.)
Art. 1837
DISSOLUTION AND WINDING UP
249
In other words, for the purpose of winding up the affairs of a
dissolved partnership, the surviving partner has full authority to
do every thing that may be necessary, but his power is limited to
the performance of acts which are indispensable to that end. The
deceased partner’s estate is not liable for any subsequent debts
or losses incurred by the surviving partners who continued the
partnership business without the consent of the estate.
ART. 1837. When dissolution is caused in any way,
except in contravention of the partnership agreement,
each partner, as against his co-partners and all persons
claiming through them in respect of their interests in
the partnership, unless otherwise agreed, may have the
partnership property applied to discharge its liabilities,
and the surplus applied to pay in cash the net amount
owing to the respective partners. But if dissolution is
caused by expulsion of a partner, bona fide under the
partnership agreement and if the expelled partner is
discharged from all partnership liabilities, either by
payment or agreement under the second paragraph of
article 1835, he shall receive in cash only the net amount
due him from the partnership.
When dissolution is caused in contravention of the
partnership agreement, the rights of the partners shall
be as follows:
(1) Each partner who has not caused dissolution
wrongfully shall have:
(a) All the rights specified in the first paragraph
of this article, and
(b) The right, as against each partner who has
caused the dissolution wrongfully, to damages for
breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or jointly
with others, may do so, during the agreed term for the
partnership and for that purpose may possess the part-
250
PARTNERSHIP
Art. 1837
nership property, provided they secure the payment by
bond approved by the court, or pay to any partner who
has caused the dissolution wrongfully, the value of his
interest in the partnership at the dissolution, less any
damages recoverable under the second paragraph, No.
1(b) of this article, and in like manner indemnify him
against all present or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the
provisions of the second paragraph, No. 2, all the
rights of a partner under the first paragraph, subject
to liability for damages in the second paragraph,
No. 1(b), of this article.
(b) If the business is continued under the
second paragraph, No. 2, of this article, the right
as against his co-partners and all claiming through
them in respect of their interests in the partnership,
to have the value of his interest in the partnership,
less any damage caused to his co-partners by the
dissolution, ascertained and paid to him in cash,
or the payment secured by a bond approved by the
court and to be released from all existing liabilities
of the partnership; but in ascertaining the value of
the partner’s interest, the value of the good will of
the business shall not be considered. (n)
Right of partner to application of partnership
property on dissolution.
The liquidation of the assets of the partnership following its
dissolution is governed by various provisions of the Civil Code
such as Article 1837. However, an agreement of the partners, like
any other contract, is binding among them and normally takes
precedence to the extent applicable over the general provisions
of the Civil Code. (Ortega vs. Court of Appeals, 245 SCRA 529
[1995].)
The objectives of Article 1837 are, in the main, to provide for
the payment of the partner who leaves the firm, and to indemnify
Art. 1837
DISSOLUTION AND WINDING UP
251
him against existing or possible future liability. (Teller, op. cit., p.
110.)
The right of every partner, on a dissolution, against the other
partners and persons claiming through them in respect of their
interests as partners, to have the partnership property applied
to discharge partnership liabilities and the surplus assets, if any,
distributed in cash to the respective partners, after deducting
what may be due to the firm from them as partners, constitutes
what is known as the “partner’s lien.” (31 Words and Phrases
380.) The extent of this right depends on whether the dissolution
is caused without violation of the partnership agreement, or in
violation of the partnership agreement. The guilty partner is
given by law certain rights.
Rights where dissolution not in contravention
of agreement.
Unless otherwise agreed, the rights of each partner in case
of dissolution without violation of partnership agreement are as
follows:
(1) To have the partnership property applied to discharge
the liabilities of the partnership; and
(2) To have the surplus, if any, applied to pay in cash the net
amount owing to the respective partners.
When the dissolution is caused by expulsion of a partner
bona fide (so without violation of the partnership agreement),
such expelled partner may be discharged from all partnership
liabilities either by payment or by an agreement between him,
the partnership creditors, and the other partners. (Art. 1835.) He
shall have the right only to receive in cash the net amount due
him from the partnership.
If the dissolution is proper or rightful, no partner is liable for
any loss sustained as a result of the dissolution.
Rights where dissolution in contravention
of agreement.
When the partnership is dissolved in violation of the part-
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PARTNERSHIP
Art. 1837
nership agreement, the rights of a partner vary depending upon
whether he is the innocent or the guilty partner.
(1) Rights of partner who has not caused the dissolution wrongfully:
(a) To have partnership property applied for the payment
of its liabilities and to receive in cash his share of the surplus;
(b) To be indemnified for damages caused by the partner
guilty of wrongful dissolution;
(c) To continue the business in the same name during the
agreed term of the partnership, by themselves or jointly with
others; and
(d) To possess partnership property should they decide
to continue the business.
(2) Rights of partner who has wrongfully caused the dissolution:
(a) If the business is not continued by the other partners,
to have the partnership property applied to discharge its
liabilities and to receive in cash his share of the surplus less
damages caused by his wrongful dissolution.
(b) If the business is continued:
1) To have the value of his interest in the partnership
at the time of the dissolution, less any damage caused by
the dissolution to his co-partners, ascertained and paid in
cash or secured by bond approved by the court; and
2) To be released from all existing and future liabilities of the partnership.
Note that the innocent partners have more rights than the
guilty partners and that the latter are made liable for damages
caused by their wrongful dissolution, and in ascertaining the
value of their interest, the value of the goodwill of the business
is not considered, obviously as a penalty for their bad faith. If
the innocent partners decide to buy the guilty partner’s interest,
they may continue the partnership business in the same firm
name. The guilty partner is entitled to his share of the appraised
value of the business less the damages recoverable by the
innocent partners. If they decide otherwise, they may wind up
the partnership business.
Art. 1837
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253
Goodwill of a business.
The goodwill of a business may be defined to be the advantage
which it has from its establishment or from the patronage of its
customers, over and above the mere value of its property and
capital. The goodwill of a partnership rests in the probability that
its old customers will continue their custom and will commend
the partnership to others, making the latter new customers. It
may also include the advantages which may be derived from
the partners holding themselves out as carrying on the business
identified with the name of a particular firm.
(1) Goodwill as part of partnership assets. — Inasmuch as the
word “assets” in the law of partnership is not to be confined to
assets at law, but includes all assets applicable to the payment
of the partnership debts, the goodwill of the partnership, if of
money value, is usually considered part of the property and
assets of the firm, in the absence of a contract, express or implied,
to the contrary.
(2) Firm name as part of goodwill. — The name of a firm is
an important part of the goodwill and its use may be protected
accordingly. The firm name of the partnership, as distinguished
from the name of an individual, is an element of the partnership
enterprise, a substantial asset thereof, and passes with a sale of
the partnership property and goodwill. (40 Am. Jur. 204.) Being
unquestionably partnership property, the representative of a
deceased partner, therefore, is entitled to have an accounting of
the value of the goodwill of the partnership and a partner may
insist that upon dissolution, the goodwill should be sold as part
of the partnership assets.
(3) Existence of saleable goodwill. — The goodwill of a business
is a proper subject of sale. However, a saleable goodwill can exist
only in a commercial partnership. It cannot arise in a professional
partnership, such as partnership of attorneys or physicians, the
reputation of which depends on the individual skill or personal
qualifications of its members. (In the Matter of the Petition for
Authority to Continue Use of the Firm Name “Ozaeta, Romulo,
etc.,” 92 SCRA 1 [1979].)
254
PARTNERSHIP
Art. 1838
Where the goodwill of the business is dependent solely on the
skill or professional ability, reputation or standing of the partners
(as attorneys, physicians) its goodwill is not subject to sale, and
the name by which it is known may not be appropriated by any
person to the exclusion of any other person. (see Teller, op. cit., p.
97, citing Baily vs. Bett, 241 N.Y. 22; cf. Hunt vs. Street, 182 Tenn.
167.)
ART. 1838. Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of
one of the parties thereto, the party entitled to rescind
is, without prejudice to any other right, entitled:
(1) To a lien on, or right of retention of, the surplus
of the partnership property after satisfying the partnership liabilities to third persons for any sum of money
paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by
him;
(2) To stand on, after all liabilities to third persons
have been satisfied, in the place of the creditors of the
partnership for any payments made by him in respect
of the partnership liabilities; and
(3) To be indemnified by the person guilty of the
fraud of making the representation against all debts
and liabilities of the partnership. (n)
Right of partner to rescind contract
of partnership.
If one is induced by fraud or misrepresentation to become a
partner, the contract is voidable or annullable. (Art. 1390[2].)
If the contract is annulled, the injured partner is entitled to
restitution. (Art. 1398.) Here, the fraud or misrepresentation
vitiates consent. (Art. 1330.) However, until the partnership
contract is annulled by a proper action in court, the partnership
relations exist (Art. 1390.) and the defrauded partner is liable for
all obligations to third persons.
Art. 1839
DISSOLUTION AND WINDING UP
255
Rights of injured partner where partnership
contract rescinded.
This article speaks of the rights of the injured partner where
the partnership contract is rescinded (should be “annulled”) on
the ground of fraud or misrepresentation. They are as follows:
(1) Right of a lien on, or retention of, the surplus of partnership property after satisfying partnership liabilities for any sum
of money paid or contributed by him;
(2) Right to subrogation in place of partnership creditors
after payment of partnership liabilities; and
(3) Right of indemnification by the guilty partner against all
debts and liabilities of the partnership.
It is to be noted that the rights of the partner entitled to rescind
(to annul) are without prejudice to any other rights under other
provisions of law.
ART. 1839. In settling accounts between the partners
after dissolution, the following rules shall be observed,
subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary
for the payment of all the liabilities specified in
No. 2.
(2) The liabilities of the partnership shall rank in
order of payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their
declaration in No. 1 of this article to the satisfaction of
the liabilities.
256
PARTNERSHIP
Art. 1839
(4) The partners shall contribute, as provided by
article 1797, the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any
person appointed by the court shall have the right to
enforce the contributions specified in the preceding
number.
(6) Any partner or his legal representative shall
have the right to enforce the contributions specified in
No. 4, to the extent of the amount which he has paid in
excess of his share of the liability.
(7) The individual property of a deceased partner
shall be liable for the contributions specified in No. 4.
(8) When partnership property and the individual
properties of the partners are in possession of a court
for distribution, partnership creditors shall have priority on partnership property and separate creditors on
individual property, saving the rights of lien or secured
creditors.
(9) Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contributions. (n)
Liquidation and distribution of assets
of dissolved partnership.
The process of winding up, where the business of the dissolved partnership is not continued, consists in liquidating partnership property (turning it into cash), paying outstanding debts,
collecting outstanding receivables, distributing the proceeds,
and any other actions required to bring partnership business to
a close. Until the partnership accounts are determined, it cannot
Art. 1839
DISSOLUTION AND WINDING UP
257
be determined how much any of the partners is entitled, if at all.
Partners severally have the implied authority to sell partnership
property and to collect obligations due to the partnership. These
powers may be delegated to one or more of their number as liquidating partner or partners.
The law, however, does not require a partnership to convert
all its assets into cash before making a distribution to the partners.
It is within the power of the court to order a distribution of its
assets in cash, property, or a combination of both.
(1) Property which may be made available for distribution
includes, in addition to the partnership property, contributions
which may be collected from the partners so far as may be
necessary for the payment of partnership obligations to creditors
and to partners. (Crane, op. cit., pp. 476-477.)
(2) A partner has a right to have debts owing to the partnership
from his co-partners deducted from their respective shares. This
right is called “equitable lien” or “quasi-lien” in American law.
It exists only when the affairs of the partnership are rounded up
and the shares of the partners are computed after dissolution.
(3) Each partner is entitled to a share in the surplus property
of the partnership, if any, in proportion to his interest in the
partnership. (see Art. 1812.) This rule is called the “partner’s lien
law” in American law.
Rules in settling accounts between
partners after dissolution.
Article 1839 sets forth a priority system for the distribution
of partnership property (see Art. 1810.) and individual property
when a partnership is dissolved to those entitled thereto.
The following rules as to distribution are subject to variation
by agreement of the partners, either in their original partnership
agreement or in a dissolution agreement (Ibid.), subject to the
rights of partnership creditors.
(1) Assets of the partnership. — They are:
(a) Partnership property (including goodwill); and
258
PARTNERSHIP
Art. 1839
(b) Contributions of the partners necessary for the
payment of all liabilities in accordance with Article 1797.
(2) Order of application of the assets. — The partnership
assets shall be applied to the satisfaction of the liabilities of the
partnership in the following order:
(a) First, those owing to partnership creditors;
(b) Second, those owing to partners other than for capital
and profits such as loans given by the partners or advances
for business expenses;
(c) Third, those owing for the return of the capital
contributed by the partners; and
(d) Finally, if any partnership assets remain, they are
distributed as profits to the partners in the proportion in
which profits are to be shared.
(3) Loans and advances made by partners. — Loans and
advances made by partners to the partnership are not capital.
Nor are undivided profits, unless otherwise agreed. Capital
contributions are returnable only on dissolution, but loans are
payable at maturity and accumulated profits may be withdrawn
at any time by consent of a majority. (Babb and Martin, op. cit., p.
240.)
Amounts paid into the partnership in excess of a partner’s
agreed capital contributions constitute loans or advances which
draw interest on which they are made. Accumulated profits do
not draw interest, as they are not regarded as loans and advances
merely because they are left with the firm. (Ibid., p. 248.)
(4) Capital contributed by partners. — Capital represents a
debt of the firm to the contributing partners. If, on dissolution,
partnership assets are insufficient to repay capital investments,
the deficit is a capital loss which requires contribution like any
other loss. (Ibid.) The return of the amount equivalent to the
capital contribution of each partner shall be increased by his
share of undistributed profits or decreased by his share of net
losses.
A partner who furnishes no capital but contributes merely
his skill and services is not entitled to any part of the firm capital
Art. 1839
DISSOLUTION AND WINDING UP
259
on dissolution in the absence of agreement. He must look for
his compensation to his share of the profits remaining after
repayment of the capital to the contributors. (Ibid., op. cit., p. 96,
citing Mosely vs. Taylor, 173 N.C. 286.)
The total capital contribution of the partners is not equivalent
to the gross assets to be distributed to the partners at the time of
the dissolution of the partnership. It may be impaired or become
unavailable for distribution or return to the partners because of
losses sustained by the partnership. (see Villareal vs. Ramirez,
406 SCRA 145 [2003].)
(5) Right of a partner where assets insufficient. — If the assets
enumerated in No. 1 are insufficient (i.e., there is an overall loss),
the deficit is a capital loss which requires contribution like any
other loss. Any partner or his legal representative (to the extent
of the amount which he has paid in excess of his share of the
liability), or any assignee for the benefit of creditors or any
person appointed by the court, shall have the right to enforce
the contributions of the partners provided in Article 1797. If any
of the partners does not pay his share of the loss, the remaining
partners have to pay but they can sue the non-paying partner for
indemnification.
(6) Liability of deceased partner’s individual property. — The
individual property of a deceased partner shall be liable for his
share of the contributions necessary to satisfy the liabilities of the
partnership incurred while he was a partner. (Arts. 1816, 1835,
par. 3.)
(7) Priority to payment of partnership creditors/partners’ creditors. — When partnership property and the individual properties of the partners are in possession of the court for distribution, partnership creditors shall first be paid from partnership
property and separate creditors from the individual properties
of the partners. (see Sec. 51, Act No. 1956 [The Insolvency Law],
as amended.) Neither class of creditors is allowed to trespass on
the fund belonging to the other until the claims of that other shall
have been satisfied. (40 Am. Jur. 402-403.)
Stated otherwise, the general rule is: “Partnership assets to
partnership creditors, individual assets to individual creditors;
260
PARTNERSHIP
Art. 1839
anything left from either goes to the other.” It involves the ranking
of assets in a certain order toward the payment of outstanding
debts. This rule is known as the doctrine of the marshalling of assets.
In an American case, it was held that the United States does not
have the right to be paid its income taxes due from individual
partners out of the assets of a bankrupt firm in preference to the
claim of partnership creditors. (United States vs. Kauffman, 267
U.S. 408, cited by Teller, p. 120.) In line with the rule is the second
paragraph of Article 1835.
Suppose one is a creditor of all the partners solidarily on a
transaction independent of the partnership, may he, under the
bankruptcy law, share pari passu with the partnership creditors
in its assets? No. This is so even though both the partnership
and its members are in bankruptcy. Having secured priority over
the firm creditors against the individual property of the firm
members, the creditors are relegated to a secondary position to
the firm creditors, since the claim is not based on a firm obligation.
(In re Nashville Laundry Co., 240 Fed. 795, cited in Teller, p. 120.)
Furthermore, partnership is regarded as a legal entity separate
and distinct from its members.
(8) Distribution of property of insolvent partner. — If a partner is
insolvent, his individual property shall be distributed as follows:
(a) First, to those owing to separate creditors;
(b) Then, to those owing to partnership creditors; and
(c) Lastly, to those owing to partners by way of contribution.
The preference of the individual creditors of a partner in the
distribution of his separate estate results, as a principle of equity,
from the preference of partnership creditors in the partnership
funds. The separate creditor of an individual partner can execute
against the assets of the firm only to the extent of the interest of
the partner in the firm assets, which is nothing more than a right
to any surplus remaining after firm creditors have been paid.
(Teller, op. cit., p. 121.)
Art. 1839
DISSOLUTION AND WINDING UP
EXAMPLES:
(1) A, B, and C, are partners. A contributed P150,000.00, B
P100,000.00, and C, P50,000.00. On dissolution, the assets of the
partnership amounted to P500,000.00. The partnership owes D
the amount of P70,000.00, E, P50,000.00, and A, P20,000.00.
(2) The accounts of the partnership shall be settled as
follows:
(a) D and E, who are partnership creditors, shall be
paid first the total sum of P120,000.00, leaving a balance of
P380,000.00;
(b) Then, A, who is also a creditor, will be paid his
credit of P20,000.00, leaving a balance of P360,000.00;
(c) Afterwards, the contributions of A, B, and C to the
partnership capital shall be returned to them in the total
sum of P300,000.00, thereby leaving a balance of P60,000.00;
(d) The balance of P60,000.00 constitutes the profit
which shall be divided among A, B, and C (unless there
is an agreement to the contrary [Art. 1839, 1st par.] which,
however, cannot prejudice the rights of third persons) in
proportion to their capital contributions. Therefore, A is
entitled to 3/6 or P30,000.00, B, 2/6 or P20,000.00 and C,
1/6 or P10,000.00.
(3) Suppose, in the same example, the liabilities of the
partnership amount to P560,000.00. The partnership assets,
then shall be exhausted to satisfy these liabilities thereby
leaving an unpaid balance of P60,000.00. The partners shall
then contribute to the loss, in the absence of an agreement to
the contrary, in accordance with their capital contributions.
Consequently, A is liable out of his separate property in the
amount of P30,000.00, B, P20,000.00, and C, P10,000.00.
These contributions which are necessary to pay the
liabilities of the partnership are considered partnership assets
(No. 1[b].) and any assignee for the benefit of creditors and any
person appointed by the court may enforce the contributions.
In case C paid the whole amount of P60,000.00, then, he has
a right to recover the amount which he has paid in excess of his
share of the liability from A, P30,000.00 and from B, P20,000.00.
(4) If B is already dead, his estate is still liable for the
contributions needed to pay off the partnership obligations
provided they were incurred while he was still a partner.
261
262
PARTNERSHIP
Art. 1840
(5) Suppose now that under Nos. 1 and 2 above, C owes F
P40,000.00. Following the rule that partnership creditors have
preference regarding partnership property, only the share of C
in the amount of P10,000.00 can be used to pay his debt to F
and the unpaid balance of P30,000.00 must be taken from the
individual property, if any, of C.
(6) Suppose again, that the partnership debts amount to
P560,000.00 as in No. 3. So, C is still liable out of his separate
property to partnership creditors in the amount of P10,000.00.
His separate property amounts to P45,000.00. In this case, his
assets shall first be applied to pay his debt of P40,000.00 to F
and the balance of P5,000.00 to pay part of his debt of P10,000.00
still owing to partnership creditors in accordance with the rule
that regarding individual properties, individual creditors are
preferred.
ART. 1840. In the following cases, creditors of the
dissolved partnership are also creditors of the person or
partnership continuing the business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more
of the partners, or to one or more of the partners and
one or more third persons, if the business is continued
without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or
the representative of a deceased partner assigns) their
rights in partnership property to the remaining partner, who continues the business without liquidation of
partnership affairs, either alone or with others;
(3) When any partner retires or dies and the business of the dissolved partnership is continued as set
forth in Nos. 1 and 2 of this article, with the consent
of the retired partners or the representative of the deceased partner, but without any assignment of his right
in partnership property;
(4) When all the partners or their representatives assign their rights in partnership property to one or more
Art. 1840
DISSOLUTION AND WINDING UP
third persons who promise to pay the debts and who
continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and the remaining partners continue the business
under the provisions of article 1837, second paragraph,
No. 2, either alone or with others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining
partners continue the business either alone or with others without liquidation of the partnership affairs.
The liability of a third person becoming a partner in
the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall
be satisfied out of the partnership property only, unless
there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth in this
article the creditors of the dissolved partnership, as
against the separate creditors of the retiring partner or
deceased partner or the representative of the deceased
partner, have a prior right to any claim of the retired
partner or the representative of the deceased partner
against the person or partnership continuing the business, on account of the retired or deceased partner’s interest in the dissolved partnership or on account of any
consideration promised for such interest or for his right
in partnership property.
Nothing in this article shall be held to modify any
right of creditors to set aside any assignment on the
ground of fraud.
The use by the person or partnership continuing
the business of the partnership name, or the name of a
deceased partner as part thereof, shall not of itself make
the individual property of the deceased partner liable
for any debts contracted by such person or partnership.
(n)
263
264
PARTNERSHIP
Art. 1840
Dissolution of a partnership by change
in membership.
(1) Causes. — The change in the relation of the partners resulting in the dissolution of the partnership may take place when
a new partner is admitted; or when a partner retires; or dies; or
when a partner withdraws; or is expelled from the partnership;
or when the other partners assign their rights to the sole remaining partner (Bernardo vs. Pascual, 109 Phil. 936 [1960].); or when
all the partners assign their rights in partnership property to
third persons.
Any change in membership dissolves a partnership and
creates a new one.
(2) Continuation of partnership without liquidation. — A partnership dissolved by any of these happenings need not undergo
the procedure relating to dissolution and winding of its business
affairs. The remaining partners (and/or new partners) may elect
to continue the business of the old partnership without interruption by simply taking over the business enterprise owned by the
preceding partner and continuing the use of the old name.10 The
rights and obligations of the partners as among themselves in
case of such continuation are set forth in Article 1837.
As the partnership is the result of a contract, a change in
the parties to the contract necessarily results in a new contract.
Hence, a change in membership of a partnership creates a new
partnership upon the continuation of the business by the partners.
Rights of creditors of dissolved partnership
which is continued.
Article 1840 deals with the rights of creditors when the partnership is dissolved by a change of membership and its business
is continued (Art. 1837[2].) by a former partner, either alone or
with new partners, without liquidation of partnership affairs.
10
There are tax considerations which underlie such an informal approach to business
on the part of the remaining and/or new partners.
Art. 1840
DISSOLUTION AND WINDING UP
265
(1) Equal rights of dissolved and new partnership creditors. — In
such case, the law makes the creditors of the dissolved partnership also creditors of the persons or partnership continuing the
business. In other words, both classes of creditors, the old and
the new, are treated alike, being given equal rights in partnership
property. The purpose of the law is to maintain the preferential
rights of the old creditors to the partnership property as against
the separate creditors of the partners. It is immaterial to determine under which one or more of the six (6) cases mentioned
in Article 1840 the dissolution falls — the creditors of the old
partnership are also the creditors of the new partnership which
continues the business of the old one without liquidation of the
partnership affairs. (Yu vs. National Labor Relations Commission, 224 SCRA 75 [1993].)
EXAMPLE:
Assume that C is admitted as a new partner into the
existing partnership of A and B.
Technically, the old firm of A and B is dissolved and a
new firm composed of A, B, and C is formed. C will not be
individually liable for the debts of the old firm. His investment,
however, constituting a part of the firm assets, will be equally
available to both creditors of the old and creditors of the new
firm. (par. 2; Art. 1826.)
Various other changes in membership effect a technical
dissolution, yet justice dictates that the two sets of creditors
involved, those of the old and those of the new firm, be treated
on an equal basis.
A note to Uniform Partnership Act provides: “Where there
is a continuous business carried on first by A, B, and C, and
then by A, B, C, and D, or by B and C, or by B and D, or by
C and D, or by B, C, and D, without liquidation of the affairs
of the dissolved partnership of A, B, and C, both justice and
business convenience require that all creditors of the business,
irrespective of the exact groupings of the owners at the time
their respective claims had their origin, should be treated alike,
all being given an equal claim on the property embarked in the
business.” (Babb & Martin, op. cit., p. 265.)
PARTNERSHIP
266
Art. 1840
(2) Liability of persons continuing business. — Note that under
paragraph 2, the liability of the new or incoming partners shall
be satisfied out of partnership property only unless there is a
stipulation to the contrary. (Art. 1826.)
Note that paragraph 1, No. 4, applies only when the third
person continuing the business of the dissolved partnership
promises to pay the debts of the partnership. Otherwise,
creditors of the dissolved partnership have no claim on the
person or partnership continuing the business or its property
unless the assignment can be set aside as a fraud on creditors
under paragraph 4.
EXAMPLE:
If A, B, and C, partners, sell the partnership business to D,
and if D promises to pay the debts and to continue the business,
the creditors of the dissolved partnership of A, B, and C are
also the creditors of D. (Ibid., op. cit., pp. 265-266.)
(3) Prior right of dissolved partnership creditors as against purchaser. — When a retiring or deceased partner has sold his interest in the partnership without a final settlement with creditors
of the partnership, such creditors have an equitable lien on the
consideration paid to the retiring or deceased partner by the purchaser thereof. This lien comes ahead of the claims of the separate creditors of the retired or deceased partner. Application of
the rule set forth in paragraph 3 does and sometimes leave the
retiring or deceased partner with a continuing liability the exact
duration of which is not specified except that it shall apply only
in favor of those creditors at the time of the retirement or death
of a partner. (Barrett & Seago, op. cit., p. 480.)
Continuation of dissolved partnership business
by another company.
(1) When corporation deemed a mere continuation of prior partnership. — The weight of authority supports the view that where
a corporation was formed by, and consisted of, members of a
partnership whose business and property was conveyed and
Art. 1840
DISSOLUTION AND WINDING UP
267
transferred to the corporation for the purpose of continuing its
business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts and is prima facie liable therefor.
The reason for the rule is that the members of the partnership
may be said to have simply put a new coat, or taken on a
corporate cloak, and the corporation is a mere continuation of the
partnership. (Laguna Transportation Co., Inc. vs. Social Security
System, 107 Phil. 833 [1960].)
(2) When obligations of company bought out considered assumed
by vendee. — In some cases, when one company buys out another
and continues the business of the latter company, the buyer may
be said to assume the obligations of the company bought out
when said obligations are not of considerable amount or value
especially when incurred in the ordinary course, and when the
business of the latter is continued.
However, when said obligation is of extraordinary value,
and the company was bought out not to continue its business but
to stop its operation in order to eliminate competition, it cannot
be said that the vendee assumed all the obligations of the rival
company. (Phil. Air Lines, Inc. vs. Balinguit, 99 Phil. 486 [1956].)
Exemption from liability of individual
property of deceased partner.
(1) Debts incurred by person or partnership continuing business.
— The last paragraph of Article 1840 primarily deals with the
exemption from liability to creditors of a dissolved partnership
of the individual property of the deceased partner for debts
contracted by the person or partnership which continues the
business using the partnership name or the name of the deceased
partner as part thereof. What the law contemplates is a hold-over
situation preparatory to formal reorganization.
(2) Commercial partnership continued after dissolution. — Article
1840 treats more of a commercial partnership with a goodwill to
protect rather than a professional partnership (see Art. 1767, par.
2.) with no saleable goodwill but whose reputation depends on
268
PARTNERSHIP
Art. 1841
the personal qualifications of its individual members. (In the
Matter of the Petition for Authority to Continue Use of the Firm
Name “Sycip, Salazar, etc.’’/”Ozaeta, Romulo, etc.,’’ 92 SCRA 1
[1979].)
As a general rule, upon the dissolution of a commercial partnership, the succeeding partners or parties have the right to carry on the business under the old name, in the absence of stipulation forbidding it, since the name of a commercial partnership
is a partnership asset inseparable from the goodwill of the firm.
On the other hand, a professional partnership the reputation of
which depends on the individual skill of the members, such as
partnerships of attorneys or physicians, has no goodwill to be
distributed as a firm asset on its dissolution, however intrinsically valuable such skill and reputation may be, especially where
there is no provision in the partnership agreement relating to
goodwill as an asset. (Ibid., citing 60 Am. Jur. 2d 115.)
ART. 1841. When any partner retires or dies, and the
business is continued under any of the conditions set
forth in the preceding article, or in article 1837, second
paragraph, No. 2, without any settlement of accounts as
between him or his estate and the person or partnership continuing the business, unless otherwise agreed,
he or his legal representative as against such person or
partnership may have the value of his interest at the
date of dissolution ascertained, and shall receive as an
ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or at
his option or at the option of his legal representative,
in lieu of interest, the profits attributable to the use of
his right in the property of the dissolved partnership;
provided that the creditors of the dissolved partnership
as against the separate creditors, or the representative
of the retired or deceased partner, shall have priority
on any claim arising under this article, as provided by
article 1840, third paragraph. (n)
Art. 1841
DISSOLUTION AND WINDING UP
269
Rights of retiring, or of estate of deceased,
partner when business is continued.
The business of the partnership is not always terminated after
dissolution. This is true where the business has been profitable
and some of the partner’s may wish to continue the business
rather than liquidate it. When the dissolution is caused by the
retirement or death of a partner and the business is continued
without settlement of accounts, the retiring partner or the legal
representative of the deceased partner shall have the right:
(1) To have the value of the interest of the retiring partner or
deceased partner in the partnership ascertained as of the date of
dissolution (i.e., date of retirement or death); and
(2) To receive thereafter, as an ordinary creditor, an amount
equal to the value of his share in the dissolved partnership with
interest, or, at his option, in lieu of interest, the profits attributable
to the use of his right.
As provided in Article 1840, the creditors of a dissolved
partnership have a prior right as against the separate creditors of
the retired or deceased partner.
If the surviving partners (in case the dissolution is caused by
the death of a partner) continue the business without the consent
of the deceased partner’s estate, they do so without any risk
to the estate; if the estate consents, it, in effect, becomes a new
partner and would be answerable for all debts and losses after
the death but only to the extent of the decedent’s share in the
partnership’s assets.
EXAMPLE:
A, B, and C are partners in X & Co. which is indebted to D
in the amount of P50,000.00. Later on, X & Co. was dissolved
by reason of the withdrawal of C. The business was continued
by A and B without any settlement of account between A and
B, on the one hand, and C, on the other.
C or his legal representative has the right to have the
value of his interest in the partnership ascertained and paid
to him. Assuming that the interest of C has been ascertained
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Art. 1842
to be P30,000.00, D has priority over the claim of C, his legal
representative, or his separate creditor.
ART. 1842. The right to an account of his interest
shall accrue to any partner, or his legal representative as
against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution, in the absence of any
agreement to the contrary. (n)
Accrual and prescription of a partner’s right
to account of his interest.
(1) The right to demand an accounting of the value of
his interest (Art. 1812.) accrues to any partner or his legal
representative after dissolution in the absence of an agreement
to the contrary.
(2) Prescription begins to run only upon the dissolution of
the partnership when the final accounting is done. Under Articles
1806, 1807, and 1809, the right to demand an accounting exists
as long as the partnership exists. (Fue Leung vs. Intermediate
Appellate Court, 169 SCRA 746 [1989].)
Person liable to render an account.
This right of a partner or the one who represents him as owner
of his interest to an account, i.e., to a statement of the partnership
affairs, and, in due course of liquidation, to a payment of the
amount of his interest, may be exercised as against:
(1) The winding up partner;
(2) The surviving partner; or
(3) The person or partnership continuing the business.
Liquidation necessary for determination
of partner’s share.
(1) Share of the profits. — The profits of a business cannot be
determined by taking into account the result of one particular
transaction instead of all the transactions had. Hence, the need
Art. 1842
DISSOLUTION AND WINDING UP
271
for a general liquidation before a member of a partnership
may claim a specific sum as his share of the profits. (Sison vs.
McQuaid, 94 Phil. 201 [1953].)
When in liquidating a partnership the profits for a given
period of time cannot be exactly determined for lack of evidence
(e.g., the books of accounts had been destroyed by white ants
[anay]), but the profits for certain periods prior and subsequent
thereto are known, the profits corresponding to the said given
time may be determined by finding the average of those profits
already known and multiplying it by the length of time included
between said periods.
Thus, assuming the liquidation of the business of a partnership
for the period from 1991 to 1995 could not be made, and the net
profit for the period between 1989 and 1990 is P16,000.00, the
average of the profits for each of these years is P8,000.00; and
assuming the net profit for the year 1996 is P11,000.00, the average
between the net profit for 1989 and 1990 and the net profit for
1996 is P9,000.00, which may be considered as the average of the
net annual profits for the period between 1991 and 1995, which
in five years make a total of P45,000.00. (see De la Rosa vs. Ortega
Go-Cotay, 48 Phil. 605 [1926].)
(2) Share in the partnership. — A partner’s share cannot be
returned without first dissolving and liquidating the partnership,
for the firm’s outside creditors have preference over the assets
of the enterprise (Arts. 1839[2], 1827.) and the firm’s property
cannot be diminished to their prejudice. (Magdusa vs. Albaran, 5
SCRA 511 [1962]; see Art. 1857.)
Upon the death of a partner, the partnership assumes the
status of partnership in liquidation. The only right his heirs
could have would be to what might result, after such liquidation,
to belong to the deceased partner, and before this is finished, it
is impossible to determine what rights and interests, if any, the
deceased had. (Bearneza vs. Dequilla, 43 Phil. 237 [1922].) In other
words, no specific amounts or properties may be adjudicated to
the heir or legal representative of the deceased partner without
the liquidation being first terminated. (Lim Tanhu vs. Ramolete,
66 SCRA 425 [1975].)
PARTNERSHIP
272
Art. 1842
ILLUSTRATIVE CASE:
Action is brought by two retiring partners for the return of their
shares against the managing partner who made a computation of their
value which computation was not approved by the other partners,
there being no proper liquidation made yet of partnership affairs.
Facts: A, B, C, D, and E formed a partnership for the sale
of general merchandise with A as the manager. During the
existence of the partnership, B and C expressed a desire to
withdraw from the firm. A thereupon made a computation
to determine the value of the partners’ shares. The results of
the computation were embodied in a document drawn in the
handwriting of A. Thereafter, B and C made demands upon
A for payment. A having refused, B and C filed a complaint
against A.
The Court of Appeals ruled in favor of B and C, holding that
the action is not one for dissolution and liquidation but one for
recovery of a sum of money with A as principal defendant and
the partnership as an alternative defendant only, as it is based
on the allegation that A, having taken delivery of the shares of
B and C, failed to pay their claims and, therefore, the liability is
personal to A.
Issue: A’s argument is that the action cannot be entertained
because in the distribution of all or part of the partnership
assets, all the partners have an interest and are indispensable
parties without whose intervention no decree of distribution
can be validly entered. Is this argument correct?
Held: Yes. (1) Return of a partner’s share. — A partner’s share
cannot be returned without first dissolving and liquidating
the partnership, for the return is dependent on the discharge
of creditors, whose claims enjoy preference over those of
the partners; and it is self-evident that all members of the
partnership are interested in its assets and business, and are
entitled to be heard in the matter of the firm’s liquidation and
the distribution of its property.
The liquidation prepared by A is not signed by D and E,
the other partners; it does not appear that they have approved,
authorized, or ratified the same and, therefore, it is not binding
upon them. At the very least, they are entitled to be heard as to
its correctness.
Art. 1842
DISSOLUTION AND WINDING UP
273
(2) Repayment of capital shares of retiring partners. — In
addition, unless a proper accounting and liquidation of the
partnership affairs is first had, the capital shares of B and C,
as retiring partners, cannot be repaid, for the firm’s outside
creditors have preference over the assets of the enterprise, and
the firm’s property cannot be diminished to their prejudice.
(3) Personal liability of manager. — Finally, A cannot be held
liable in his personal capacity for the payment of partners’
shares, for he does not hold them except as a manager of or
trustee for the partnership. It is the latter that must refund
the shares to the retiring partners. (B and C.) Since not all the
members have been impleaded, no judgment for refund can be
rendered. (Magdusa vs. Albaran, supra.)
When liquidation not required.
As a general rule, when a partnership is dissolved, a partner
or his legal representative is entitled to the payment of what may
be due after a liquidation. But no liquidation is necessary when
there is already a settlement or an agreement as to what he shall
receive.
ILLUSTRATIVE CASES:
1. Withdrawing partner agreed to relinquish all rights and
interests in the partnership upon the return of his investment.
Facts: A withdrew as partner from partnership X. It was
the intention and understanding of the parties that A was
relinquishing all his rights and interests in the partnership
upon the return of all his investment, subject to the condition
that A was to be repaid within three (3) days from the date the
settlement was agreed upon.
This condition was fulfilled when on the following day, A
was reimbursed the amount due him under the agreement.
Issue: Is A entitled to profits of the partnership at the time
of dissolution?
Held: No liquidation was called for because there was
already a settlement as to what A should receive. It appeared that
the settlement was agreed upon the very day the partnership
was dissolved. The acceptance by A of his investment was
Art. 1842
PARTNERSHIP
274
understood and intended as a final settlement of whatever
right or claim A might have in the dissolved partnership. A was
precluded from claiming any share in the profits should there
be any, at the time of dissolution. (Bonnevie vs. Hernandez, 95
Phil. 175 [1954].)
________
________
________
2. Plaintiff, in violation of his promise, refused to sign the final
statement of accounts after receiving, without reservation, his share
in the partnership.
Facts: Partnership X was dissolved. A promised to sign
the last and final statement of accounts as soon as he receives
his shares as shown in said statement. A accepted such share
without any reservation but he refused to sign the statement.
Issue: Is A still entitled to liquidation?
Held: No. The statement was deemed approved when A
received his share without any reservation. The signing became
a mere formality to be complied with by A exclusively and his
refusal to sign, after receiving his shares, amounted to a waiver
of that formality. This approval precludes any right on the part
of A to a further liquidation unless he can show that there was
fraud, deceit, error, or mistake in said approval. (Ornum vs.
Lasala, 74 Phil. 242 [1943].)
— oOo —
275
Chapter 4
LIMITED PARTNERSHIP (n)
Brief history.
Though the limited partnership came into general use only
recently, its history is perhaps more ancient than that of the
ordinary partnership. It is undoubtedly an outgrowth of the
Roman Law, which provided that one or more persons might
turn over property to a slave and avoid personal liability by
trading through him.
Gradually, there grew up in the civil law, rules governing
this form of business, substituting, of course, for the slaves, free
persons who become general partners with unlimited liability.
Louisiana, which uses the civil instead of the common law,
recognized this form of organization. In 1822, the principal
rules on limited partnership which grew up in the civil law
were codified and enacted into a statute by the State of New
York. New York’s lead has been followed by most common law
jurisdictions though England did not fall into line until 1907.
(Charles W. Gerstenberg, “Organization and Control” [1919], 3
Modern Business, p. 50.)
Under the name of la societé en commandite, the system
of limited partnership has existed in France. In the vulgar
latinity of the Middle Ages it was styled commanda, and in Italy
accommenda. In the Middle Ages, it was one of the most frequent
combinations of trade, and was the basis of the active and widely
extended commerce of the opulent maritime cities of Italy. At a
period when capital was in the hands of nobles and clergy, who,
from pride of caste, or canonical regulations, could not engage
directly in trade, it afforded the means of secretly embarking in
commercial enterprises, and reaping the profits of such lucrative
275
276
PARTNERSHIP
Art. 1843
pursuits, without personal risk. The special partnership is, in
fact, no novelty, but an institution of considerable antiquity, well
known, understood and regulated.
The French Code permits a special partnership, of which the
capital may be divided into shares of stock, transmissible from
hand to hand. In such a case, the death of the special partner
does not dissolve the firm, the creation of transmissible shares
being a proof that the association is formed respectu negotii, and
not respectu personarum; but even in such a partnership, the death
of the general partner effects a dissolution, unless it is expressly
stipulated otherwise. But it would be wrong to extend the rule that
a partnership, of which the capital is divided into transmissible
shares, is not dissolved by the death of a stockholder, to a special
partnership, the capital of which is not so divided.
The statute of New York recognizes only the latter kind of
partnership, the names of parties being required to be registered,
and any change in the name working a dissolution, and turning
the firm into a general partnership. Such a partnership has always
been held to be dissolved by the death of the special partner.
The partnership remains under the dominion of the common
law. It has created between the special and general partner a tie,
which is not subjected to the caprice of unforeseen changes; it
has produced mutual relations of confidence, which the general
partner cannot be forced to extend to strangers. (Ames vs.
Doroning, Brad [N.Y. Surr. Cit.] 321, 329 [1850].)
Sources of Civil Code provisions.
“Chapter 4 (Arts. 1843 to 1867.) on limited partners was
adopted, also with appropriate amendments, from the Uniform
Limited Partnership Act. The provisions on limited partnerships
in the Code of Commerce (Arts. 145 to 150.) were considered
too meager and inadequate to govern this juridical institution.”
(Report of the Code Commission, p. 149; see Art. 1867.)
ART. 1843. A limited partnership is one formed by
two or more persons under the provisions of the following article, having as members one or more general
Art. 1843
LIMITED PARTNERSHIP
277
partners and one or more limited partners. The limited
partners as such shall not be bound by the obligations
of the partnership.
Concept of limited partnership.
This article defines a limited partnership. The term is sometimes
used to designate joint ventures and partnerships limited only in
respect of the nature and scope of the business to be carried on.
The correct usage of the term confines it to the form of business
association composed of one or more general partners and one
or more special partners, the latter not being personally liable for
the partnership debts. (68 C.J.S. 1004.) A limited partnership is
thus composed of two classes of partners.
It is so called because the liability to third persons of one or
more of its members referred to as limited (or special) partners
is limited to a fixed amount (Hoefer vs. Hall, 411 P.d. 230.), their
capital contributions or the amount they have invested in the
partnership. This limited liability is the key characteristic of the
limited partnership.
Characteristics of limited partnership.
As a general rule, the characteristics of a limited partnership
are as follows:
(1) A limited partnership is formed by compliance with the
statutory requirements (Art. 1844.);
(2) One or more general partners control the business and
are personally liable to creditors (Arts. 1848, 1850.);
(3) One or more limited partners contribute to the capital
and share in the profits but do not participate in the management
of the business and are not personally liable for partnership
obligations beyond the amount of their capital contributions
(Arts. 1845, 1848, 1856.);
(4) The limited partners may ask for the return of their
capital contributions under the conditions prescribed by law
(Arts. 1844[h], 1857.); and
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PARTNERSHIP
Art. 1843
(5) The partnership debts are paid out of common fund and
the individual properties of the general partners.
The general partners are treated by the law much like a
partner in an ordinary partnership. They are typically those
who know how to manage the business. The limited partners
are usually those who put money for the business. They are only
investors. Their limited liability is an exception to the general rule
that all partners, including industrial partners, are liable pro rata
with all their property for partnership debts. (Art. 1816.) Thus, a
limited partner has the same type of liability as stockholder in a
corporation.
Business reason and purpose of statutes
authorizing limited partnerships.
(1) Secure capital from others for one’s business and still retain
control. — “The business reason for the adoption of acts making
provisions for limited or special partners is that men in business
often desire to secure capital from others. There are at least three
classes of contracts which can be made with those from whom
the capital is secured: First, the ordinary loan on interest. Second,
the loan where the lender, in lieu of interest, takes a share in the
profits of the business. Third, those cases in which the person
advancing the capital secures, besides a share in the profits, some
measure of control over the business.
The lender who takes a share in the profits does not by reason
of that fact, run a risk of being held as a partner. If, however, his
contract falls within the third class mentioned and he has any
measure of control over the business, he at once runs serious risk
of being liable for the debts of the business as a partner.” (Sec. 17,
Commissioners’ Note, 8 Uniform Laws Annotated, pp. 2-5.)
(2) Share in profits of a business without risk of personal liability.
— “The policy of laws authorizing the formation of limited
partnerships is to bring into trade and commerce funds of those
not inclined to engage in that business, who are disposed to
furnish capital upon such limited liability with a view to the
share of profits which might be expected to result to them from
its use.” (40 Am. Jur. 474.)
Art. 1843
LIMITED PARTNERSHIP
279
(3) Associate as partners with those having business skill. —
“The primary purpose of the statute authorizing the formation
of limited partnerships is to encourage those having capital to
become partners with those having skill, by limiting the liability
of the former to the incidental amount actually contributed
by them. The object of such a statute is to furnish reasonable
protection to those dealing with the concern by requiring acts
to be done and public notice thereof given so that all who desire
may know the essential features of the arrangement.” (68 C.J.S.
1006.)
Differences between a general partner/partnership
and a limited partner/partnership.
They are the following:
(1) A general partner is personally liable for partnership
obligations (Art. 1816.), while a limited partner’s liability extends
only to his capital contribution (Arts. 1845, 1848, 1856.);
(2) When the manner of management has not been agreed
upon, all of the general partners have an equal right in the
management of the business (Arts. 1803, 1810[3].), whether or
not the general partner has made any capital contribution, while
a limited partner has no share in the management of a limited
partnership, his rights being limited to those enumerated in
Article 1851, such that he renders himself liable to creditors as a
general partner if he takes part in the control of the business (Art.
1848.);
(3) A general partner may contribute money, property, or
industry to the partnership (Art. 1767.), while a limited partner
must contribute cash or property to the partnership but not
services (Art. 1845.);
(4) Unlike a general partner, a limited partner is not a
proper party to proceedings by or against a partnership unless
he is also a general partner (Art. 1853.), or where the object of
the proceeding is to enforce a limited partner’s right against, or
liability to, the partnership (Art. 1866.);
PARTNERSHIP
280
Art. 1843
(5) A general partner’s interest in the partnership (Art. 1812.)
may not be assigned as to make the assignee a new partner
without the consent of the other partners (Art. 1813.) although
he may associate a third person with him in his share (Art. 1804.),
while a limited partner’s interest is freely assignable, with the
assignee acquiring all the rights of the limited partner subject to
certain qualifications1 (Art. 1859.);
(6) The name of a general partner may appear in the firm
name (Art. 1815.), while, as a general rule, that of a limited
partner must not (Art. 1846.);
(7) A general partner is prohibited from engaging in a
business which is of the kind of business in which the partnership
is engaged, if he is a capitalist partner (Art. 1808.), or in any
business for himself if he is an industrial partner (Art. 1789.),
while there is no such prohibition in the case of a limited partner
who is considered as a mere contributor to the partnership (see
Art. 1866.); and
(8) The retirement, death, insanity, or insolvency of a general
partner dissolves the partnership (Arts. 1860, 1830, 1831.), while
the retirement, etc. of a limited partner does not have the same
effect, for his executor or administrator shall have the rights of a
limited partner for the purpose of selling his estate. (Art. 1861.)
The above also indicate the differences between a general
partnership and a limited partnership. The other differences are:
a general partnership may, as a general rule, be constituted in
any form by contract or conduct of the parties, while a limited
partnership is created by the members after compliance with
the requirements set forth by law; it is composed only of general
partners; it must operate under a firm name which in the case of
a limited partnership must be followed by the word “Limited”
(Art. 1844[1, a].); and its dissolution and winding up are governed
by different rules.
1
When it is said, in distinguishing a limited partnership from the general partnership, that a limited partner’s interest is freely assignable by the limited partner while a
general partner’s interest is not assignable, it is meant that a limited partner causes no
rupture of the partnership business by his assignment, while a general partner’s assignment may cause such a rupture. (Teller, op. cit., p. 54.)
Art. 1844
LIMITED PARTNERSHIP
281
A limited partnership, unless prohibited by law, may carry on
any business which could be carried on by a general partnership.
ART. 1844. Two or more persons desiring to form a
limited partnership shall:
(1) Sign and swear to a certificate, which shall state:
(a) The name of the partnership, adding thereto
the word “Limited”;
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each
member, general and limited partners being respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and description of and
the agreed value of the other property contributed
by each limited partner;
(g) The additional contributions, if any, to be
made by each limited partner and the times at which
or events on the happening of which they shall be
made;
(h) The time, if agreed upon, when the contribution of each limited partner is to be returned;
(i) The share of the profits or the other compensation by way of income which each limited partner
shall receive by reason of his contribution;
(j) The right, if given, of a limited partner to
substitute an assignee as contributor in his place,
and the terms and conditions of the substitution;
(k) The right, if given, of the partners to admit
additional limited partners;
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PARTNERSHIP
Art. 1844
(l) The right, if given, of one or more of the limited partners to priority over other limited partners,
as to contributions or as to compensation by way of
income, and the nature of such priority;
(m) The right, if given, of the remaining general
partner or partners to continue the business on the
death, retirement, civil interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and receive property other than cash in return
of his contribution.
(2) File for record the certificate in the Office of the
Securities and Exchange Commission.
A limited partnership is formed if there has been
substantial compliance in good faith with the foregoing
requirements.
Limited partnership not created by
mere voluntary agreement.
As owner of a business can avoid personal liability for business debts only if this is provided by statute. Since in a limited
partnership a person is allowed to share in the profits without
becoming personally liable to partnership creditors, a limited
partnership can be created only where permitted by statute.
The creation of a limited partnership is a formal proceeding
and is not a mere voluntary agreement, as in the case of a
general partnership. Accordingly, the requirements of the statute
must be followed (Barrett & Seago, op. cit., Vol. 2, p. 494.) so
that public notice may be given to all who desire to know the
essential features of the partnership. (see 68 C.J. 1006.) A limited
partnership is formed if there has been substantial compliance in
good faith with the requirements set forth in Article 1844. (last
par.); otherwise, the liability of the limited partners becomes the
same as that of general partners.
Art. 1844
LIMITED PARTNERSHIP
283
Requirements for formation of a limited
partnership.
Under Article 1844, there are two essential requirements for
the formation of a limited partnership:
(1) The certificate or articles of the limited partnership which
states the matters enumerated in the article, must be signed and
sworn to; and
(2) Such certificate must be filed for record in the Office of
the Securities and Exchange Commission.
The purpose of requiring the filing of the certificate is to give
actual or constructive notice to potential creditors or persons
dealing with the partnership to acquaint them with its essential
features, foremost among which is the limited liability of the
limited partners so that they may not be defrauded or misled.
As no time is fixed by the law for the filing of the certificate for
a limited partnership, a reasonable time is allowed depending
on the circumstances of the particular case. To show failure to
comply with certificate requirements and resulting general
liability, the burden is on the one seeking to fix general liability.
(Ibid.)
Article 1844 does not specify the time within which the certificate must be filed with the Securities and Exchange Commission.
Execution of the prescribed certificate.
A prime requisite to the formation of a limited partnership,
under Article 1844, is the execution of the prescribed certificate.
This document, as a rule, must contain the matters enumerated
in said article. Thus, a limited partnership cannot be constituted
orally.
(1) The requirement of statements as to the names of the
partners, the capital contributed by the limited partners, and
the duration of the partnership, is manifestly designed for the
protection of those who deal with the firm, and must be strictly
observed by the partners. The certificate need not contain
anything concerning the amounts to be contributed by the
general partners.
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PARTNERSHIP
Art. 1844
(2) It is immaterial that the certificate purports to be one for the
renewal or continuance of an existing limited partnership when
it is in fact one for the formation of a new limited partnership, as
long as the essential requirements of the law have been satisfied.
(3) The statements required in the certificate must be true at
the time the certificate and other required papers are filed with
the Securities and Exchange Commission. (68 C.J.S. 1010.)
(4) A person who files a false certificate thereby renders
himself liable as a general partner. The filing of a false affidavit
does not result in imposing personal liability as a penalty, but
merely as a consequence of the fact that the law refuses protection
to one filing a false affidavit. The perjurious “limited partner”
becomes a general partner, since he is a contributor of capital to a
partnership operating in his behalf. (Teller, op. cit., p. 31; see Art.
1847.)
Substantial compliance in good faith
sufficient.
A strict compliance with the legal requirements is not
necessary. It is sufficient that there is substantial compliance in
good faith. If there is no substantial compliance, the partnership
becomes a general partnership as far as third persons are
concerned, in which all the members are liable as general
partners. (see Jo Chung Cang vs. Pacific Commercial Co., 45 Phil.
142 [1923].)
(1) Rules applicable where there is no substantial compliance. —
There is authority to the effect that the firm is such a general
partnership only as to its relation to third persons; that the firm,
in form is a limited partnership, subject to all the rules applicable
to such partnership; that as between the partners they are bound
by their agreement; and that all the limited partner’s relations to
his co-partners and their obligations to him growing out of the
relation remain unimpaired. (68 C.J.S. 1016.)
Where neither the rights of third parties nor a partner’s
claim of limited liability is involved, it is difficult to see how the
failure to comply with the legal requirements could affect the
existence of a limited partnership insofar as the parties, inter se,
Art. 1844
LIMITED PARTNERSHIP
285
are concerned where the written agreement executed by them is
clear and unambiguous. (Hoefer vs. Hall, 411 P.d. 230.) Thus, a
limited partner treated as a general partner as far as third persons
are concerned is entitled to reimbursement from the general
partner or partners for whatever obligations he might have paid
to partnership creditors beyond his capital contribution.
(2) Rule where partnership creditor guilty of estoppel. — Where
a certificate of formation of a limited partnership is defective
and shows on its face that the statutory requirements have not
been complied with, it has been held that a court can on its own
motion hold that a limited partnership has not been formed.
(Vanhorn vs. Corcoran, 127 Pa. 255, 18 A 16, 4 LRA 386.) But if
attaching creditors recognize and deal with a firm as a limited
partnership, they will be estopped from insisting that there is no
such partnership, or that the terms of the partnership were not
sufficiently stated in the notice of its formation. (40 Am. Jur. 476.)
Presumption of general partnership.
A partnership transacting business is, prima facie, a general
partnership and those who seek to avail themselves of the
protection of laws permitting the creation of limited partnerships
must show due compliance with such laws. In other words, to
obtain the privilege of a limited partnership liability, one must
conform to the statutory requirements regulating the formation
of limited partnerships. (Ibid., 475.)
The failure of a limited partnership to extend its term when
it expired (see Art. 1844[1, e].), and to register it anew with the
Commission, has the effect of divesting the limited partners
of the privilege of limited liability. As far as third persons are
concerned, the law considers the firm as a general partnership
(McDonald vs. Morky, U.S.L. 499, prom. May 21, 1956.) having
juridical personality. (SEC Opinion, May 1968.)
Construction of provisions on limited
partnerships.
In the construction of statutes regulating the organization of
limited partnerships, it is a general rule that the courts should
286
PARTNERSHIP
Art. 1845
adopt and enforce a reasonable construction which, on the one
hand, will not defeat one of the objects of the law and, upon the
other hand, will not, under cover of a substantial compliance
with the requirements of the statute, fritter away the protection
which the law has thrown around persons dealing with such
partnerships. (Ibid.)
Accordingly, the courts must consider substance rather than
form in construing the law. However, it should be construed to
insure substantial compliance with all the statutory provisions
which are designed for the protection of persons dealing with the
partnership. (68 C.J.S. 1007.)
Who may become limited partners.
Under a statute which provides that the membership of a
limited partnership consists of specified “persons” (see Art.
1843.), a partnership cannot become a limited partner. An existing
general partnership may be changed into a limited one, and a
partner in the former general partnership may become a limited
partner in the limited partnership thus formed. (68 C.J.S. 1009.)
ART. 1845. The contributions of a limited partner
may be cash or other property, but not services.
Limited partner’s contribution.
(1) Medium. — A limited partner or special partner is not
allowed to contribute services. He can contribute only money
or property;2 otherwise, he shall be considered an industrial and
general partner, in which case, he shall not be exempted from
personal liability.
(a) A partner may be a general partner and a limited
partner in the same partnership at the same time, provided
2
It is the policy of the Securities and Exchange Commission to require non-resident
aliens forming a commercial partnership with Filipinos or resident aliens to pay in full
their contributions in the partnership and to be accepted only as limited partners. The
reason for this requirement is based upon the fact that once non-resident aliens leave the
Philippines, it would be difficult to collect their unpaid contributions or to hold them liable for their share of partnership liabilities should they be allowed to become partners
of the firm. (SEC Opinion, Feb. 19, 1963.)
Art. 1845
LIMITED PARTNERSHIP
287
that this fact shall be stated in the certificate provided for in
Article 1844 (Art. 1853.), but a limited partner may not be an
industrial partner without being a general partner in view of
Article 1845 which requires that a limited partner must be a
capital contributor. It is not clear whether the rule still applies
if the contribution of services is made after the formation of
the limited partnership.
EXAMPLE:
In a limited partnership composed of A, B, and C, the
contributions may be as follows: A — cash (limited partner);
B — cash (general partner); and C — services (general partner).
Any of the partners may be a general partner and a
limited partner at the same time. The contribution may be
cash or property only, or both capital and services. Thus, if
A, in addition to cash, also contributes services, he becomes
a general partner and a limited partner at the same time; if he
contributes services only, he is a general partner.
If a partner contributes capital only, he is either a general
partner or a limited partner, or both, depending upon the
agreement as stated in the certificate.
(b) The law is not satisfied by the limited partner’s
contribution in promissory notes, checks, particularly if
they are post-dated, or bonds, or by a contribution partly in
cash or property and partly in notes or checks. However, a
check may be treated as an actual payment in cash where the
limited partner has money actually in the bank to his credit,
and he gives the general partner absolute and final control
of the amount named therein. Thus, a certified check or a
manager’s check satisfies the law. A check which is credited
to the general partner by his bank as cash has been held to be
cash payment by the limited partner. (68 C.J.S. 1011.)
(2) Time. — The contribution of each limited partner must
be paid before the formation of the limited partnership (see Art.
1844[f].), although with respect to the additional contributions
they may be paid after the limited partnership has been formed.
(Ibid., [g].)
288
PARTNERSHIP
Arts. 1846-1847
ART. 1846. The surname of a limited partner shall
not appear in the partnership name unless:
(1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became such, the business had been carried on under a
name in which his surname appeared.
A limited partner whose surname appears in a partnership name contrary to the provisions of the first
paragraph is liable as a general partner to partnership
creditors who extend credit to the partnership without
actual knowledge that he is not a general partner.
Effect where surname of limited partner
appears in partnership name.
The limited partner violating this article is liable, as a general
rule, to partnership creditors without, however, the rights of
a general partner. Of course, such limited partner shall not be
liable as a general partner with respect to third persons with
actual knowledge that he is only a limited partner.
ART. 1847. If the certificate contains a false statement, one who suffers loss by reliance on such statement may hold liable any party to the certificate who
knew the statement to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time before the statement was relied upon to enable him to
cancel or amend the certificate, or to file a petition for its
cancellation or amendment as provided in Article 1865.
Liability for false statement in certificate.
Under this provision, any partner to the certificate containing
a false statement is liable provided the following requisites are
present:
(1) He knew the statement to be false at the time he signed the
certificate, or subsequently, but having sufficient time to cancel
Art. 1848
LIMITED PARTNERSHIP
289
or amend it or file a petition for its cancellation or amendment,
he failed to do so;
(2) The person seeking to enforce liability has relied upon
the false statement in transacting business with the partnership;
and
(3) The person suffered loss as a result of reliance upon such
false statement.
It has been held that a limited partner whose capital contribution is greater than that specified in the certificate of limited
partnership is not thereby liable for making a false statement under Section 6 of the Limited Partnership Act (Art. 1847.), since
there is no liability without showing a loss, and such a loss can be
established only by showing a capital contribution which is less,
not greater, than that specified. (Gilman Paint and Varnish Co.
vs. Legum, 197 Md. 665, 29 ALR 3d 286; 40 Am. Jur. [1960] Supp.
51.)
Article 1847 does not say that the guilty partner shall be liable
as a general partner. The liability imposed by Article 1847 is
merely a statutory penalty and does not make the limited partner
a general partner for all purposes, even as to third persons.
EXAMPLES:
(1) A, a limited partner, appeared as a general partner in
the certificate. If Article 1847 is applicable, he cannot raise the
defense that he is merely a limited partner to escape personal
liability to innocent third persons in case the other general
partners are insolvent.
(2) The contribution of A, limited partner, is erroneously
stated in the certificate as P15,000.00 instead of P10,000.00. If
Article 1847 is applicable, he may be made liable to innocent
third persons for the difference of P5,000.00.
In the above examples, A is not liable and is a limited
partner with respect to his co-partners with knowledge of the
falsity.
ART. 1848. A limited partner shall not become liable
as a general partner unless, in addition to the exercise of
his rights and powers as a limited partner, he takes part
in the control of the business.
290
PARTNERSHIP
Art. 1848
Liability of limited partner for participating
in management of partnership.
Under the express provision of Article 1848, a limited partner
is liable as a general partner for the firm’s obligations if he takes
part or interfere in the management of the firm’s business. His
abstinence from participation in fact in the transaction of the
business of the firm is essential to his exemption from liability
for the debts of the firm. The bare grant of apparent control to a
limited partner is not sufficient to make him liable as a general
partner where he has not actually participated in the control of
the partnership.
Whether the limited partner has participated in the management is to be determined by whether he has exercised a controlling power in the firm’s transactions. What constitutes control of
the business sufficient to make a limited partner liable as a general partner has not been clearly defined by the courts. (68 C.J.S.
629.)
Active management of partnership business
contemplated.
It would seem that such control contemplates active participation in the management of the partnership business and does
not comprehend the mere giving of advice to general partners as
to specific matters which the latter may follow or not. Being also
interested in the success of the partnership business, a limited
partner does not thereby forfeit his right to make suggestions
or express opinions as to the advisability of certain transactions.
(Silvola vs. Reulett, 272 P.d. 287.)
The limited partner takes part in the management of the
business and is liable generally for the firm’s obligations where:
(1) The business of the partnership is in fact carried on by a
board of directors chosen by the limited partners;
(2) By the terms of the contract between the parties, an
appointee of the limited partner becomes the directing manager
of the firm;
Arts. 1849-1850
LIMITED PARTNERSHIP
291
(3) The limited partner purchases the entire property of
the partnership, taking title in himself and then carries on the
business in his own name and for his own exclusive benefit; or
(4) He makes or is a party to a contract with creditors of an
insolvent firm with respect to the disposal of the firm’s assets in
payment of the firm’s debts. (Ibid.)
The interference contemplated by Article 1848 is with respect
to an existing limited partnership. Accordingly, a limited partner
is not subject to general liability for taking part in the management
of the firm because he settles its affairs after dissolution. (Ibid.)
ART. 1849. After the formation of a limited partnership, additional limited partners may be admitted upon
filing an amendment to the original certificate in accordance with the requirements of article 1865.
Admission of additional limited partners.
After a limited partnership has been formed, additional
limited partners may be admitted, provided there is proper
amendment to the certificate which must be signed and sworn
to by all of the partners, including the new limited partners, and
filed in the Securities and Exchange Commission pursuant to the
requirements of Article 1865.
ART. 1850. A general partner shall have the rights
and powers and be subject to all the restrictions and
liabilities of a partner in a partnership without limited
partners. However, without the written consent or ratification of the specific act by all the limited partners, a
general partner or all of the general partners have no
authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to
carry on the ordinary business of the partnership;
(3) Confess a judgment against the partnership;
292
PARTNERSHIP
Art. 1850
(4) Possess partnership property, or assign their
rights in specific partnership property, for other than a
partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the
right to do so is given in the certificate;
(7) Continue the business with partnership property on the death, retirement, insanity, civil interdiction
or insolvency of a general partner, unless the right so to
do is given in the certificate.
Rights, powers, and liabilities
of a general partner.
The essential feature of a limited partnership is the union of
two classes or types of members — the limited partner and the
general partner. The law expressly requires that there be at least
one general partner (Art. 1843.) with unlimited liability. (40 Am.
Jur. 477.)
(1) Right of control/unlimited personal liability. — A general
partner in a limited partnership is vested with the entire
control of the firm’s business and has all the rights and powers
and is subject to all the liabilities and restrictions of a partner
in a partnership without limited partners, i.e., in a general
partnership. It is in consideration of his unlimited personal
liability for the obligation of the partnership that he is granted
the general authority to manage the firm’s business.
In the absence of an agreement to the contrary, he is not
entitled to compensation for his services beyond his share of the
profits.
(2) Acts of administration/acts of strict dominion. — As a rule,
he may bind the partnership by any act of administration, but
he has no power to do the specific acts enumerated in Article
1850 (even if agreed to by all the general partners) without the
written consent or at least ratification of all the limited partners.
The said acts are acts of strict dominion or ownership and are,
Art. 1851
LIMITED PARTNERSHIP
293
therefore, beyond the scope of the authority of a general partner.
(Art. 1818.)
(a) In No. (1), the act is in violation of the agreement of
the partners as contained in the certificate;
(b) In Nos. (2) to (4), the acts are prejudicial to the interests
of the limited partners;
(c) In Nos. (5) and (6), the rule is based on the highly
fiduciary nature of the partnership relation; and
(d) In No. (7), any of the events mentioned results in the
dissolution of the partnership. (see Art. 1860.)
The general partner who violates the requirement imposed
by Article 1850 is liable for damages to the limited partners.
(3) Other limitations. — The general partners, of course, have
no power to bind the limited partners beyond the latter’s investment. (40 Am. Jur. 477.) Neither do they have the power to act
for the firm beyond the purpose and scope of the partnership,
and they have no authority to change the nature of the business
without the consent of the limited partners. In this respect, the
certificate duly filed binds all persons dealing with the firm to
take notice of, and be charged with knowledge of, its contents.
Duties and disabilities arising out of the firm’s transactions with
third persons rest solely on the general partners. (68 C.J.S. 1025.)
ART. 1851. A limited partner shall have the same
rights as a general partner to:
(1) Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them;
(2) Have on demand true and full information of all
things affecting the partnership, and a formal account
of partnership affairs whenever circumstances render it
just and reasonable; and
(3) Have dissolution and winding up by decree of
court.
294
PARTNERSHIP
Art. 1851
A limited partner shall have the right to receive a
share of the profits or other compensation by way of income, and to the return of his contribution as provided
in articles 1856 and 1857.
Rights, in general, of a limited partner.
The limited partner is viewed as a partner only to a certain
extent. His powers, actual or implied, are much more limited
than those of a general partner. As between the members of the
firm, the limited partner, in order to protect his interest in the
firm, has the same right to compel the partners to account as a
general partner has.
Wrongdoing or improper acts on the part of general partners
may not give a limited partner greater rights than the law and
what his contract grants him. (68 C.J.S. 1022.)
Specific rights of a limited partner.
Article 1851 enumerates the specific rights of the limited
partner in the partnership. They are as follows:
(1) To require that the partnership books be kept at the
principal place of business of the partnership (see Art. 1805.);
(2) To inspect and copy at a reasonable hour partnership
books or any of them (Ibid.);
(3) To demand true and full information of all things affecting
the partnership (see Art. 1806.);
(4) To demand a formal account of partnership affairs
whenever circumstances render it just and reasonable (see Art.
1809.);
(5) To ask for dissolution and winding up by decree of court
(see Arts. 1831, 1857, par. 4.);
(6) To receive a share of the profits or other compensation by
way of income (Art. 1856.); and
(7) To receive the return of his contribution provided the
partnership assets are in excess of all its liabilities. (Art. 1857.)
Art. 1852
LIMITED PARTNERSHIP
295
The rights of a limited partner are necessarily lesser than
those of a general partner. He cannot take part in the control
of the business (Art. 1848.) which is left to the general partner
or partners. But whenever the liability of a general partner is
imposed on a limited partner, he is given the corresponding
rights of a general partner. (40 Am. Jur. 478-479.)
ART. 1852. Without prejudice to the provisions of
article 1848, a person who has contributed to the capital
of a business conducted by a person or partnership erroneously believing that he has become a limited partner
in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner
with the person or in the partnership carrying on the
business, or bound by the obligations of such person or
partnership; provided that on ascertaining the mistake
he promptly renounces his interest in the profits of the
business or other compensation by way of income.
Status of partner where there is failure
to create limited partnership.
In this regard, it is to be noted that the law (Art. 1844, par. 2.)
provides that the limited partnership is formed where there has
been substantial compliance in good faith with the requirements
thereof. If the law is not complied with, the attempt to limit the
liability of the limited partners will be ineffective, at least as to
creditors who have not recognized, or dealt with, the firm as a
limited partnership. However, it may be more accurate to say
that sometimes the limited partnership exists in spite of the
failure of the firm to comply with the law, and that the limited
partner is merely made liable for the debts of the firm as if he
were a general partner. (40 Am. Jur. 478.)
Article 1852 grants exemption from liability in favor of one
who has contributed to the capital of a business conducted
by a person or partnership erroneously believing that he has
become a limited partner in a limited partnership, or in a general
partnership thinking that it is a limited partnership. It introduces
296
PARTNERSHIP
Art. 1852
a substantial modification of liability where there has been a
failure to create a limited partnership.
Status of person erroneously believing
himself to be a limited partner.
(1) Conditions for exemption from liability as general partner.
— A person who has contributed capital to a partnership,
erroneously believing that he has become a limited partner, as
when his name appears in the certificate as a general partner or
he is not designated as a limited partner (see Art. 1844[d].), is not
personally liable as a general partner by reason of his exercise of
the rights of a limited partner, provided:
(a) On ascertaining the mistake, he promptly renounces
his interest in the profits of the business or other compensation
by way of income (Art. 1852.);
(b) His surname does not appear in the partnership name
(Art. 1846.); and
(c) He does not participate in the management of the
business. (Art. 1848.)
(2) Necessity of renouncing his interest. — The person, however,
must promptly renounce his interest (e.g., selling it to the general
partners) before the partnership has become liable to third
persons who cannot be blamed for considering him a general
partner. Where no partnership creditors are prejudiced, it would
seem that renunciation of his interest is not necessary.
(3) Obligation to pay back profits and compensation already
received. — An interesting question arises: whether it is necessary
for such person to pay back all past profits and interest to avoid
being held liable as a general partner, or whether he need only
renounce all further interest in the profits of the business.
(a) It would seem that the requirement of renunciation
refers only to profits or compensation not yet paid over for
a person can hardly be said to have an interest in profits or
compensation he has already received, and this is fortified
by the general usage of the word “renounce” which does
not commonly have the meaning of “return.” Hence, there is
Art. 1852
LIMITED PARTNERSHIP
297
no obligation to return or pay back profits or compensation
already received.
(b) However, the opposite view also has merit. The intention behind the provision should be given more importance
than the actual words used. The most that the statute could
have intended was to put partnership creditors in the position they would have occupied had there been no limited
partner at the time the obligations were contracted. (see Gilman Paint & Varnish Co. vs. Legum, 29 A.L.R. 2d 286, 295.)
ILLUSTRATIVE CASE:
A limited partnership was organized under a law that had been
repealed, and subsequently, bankruptcy proceedings were instituted
against the firm and the members.
Facts: A and B, both stockbrokers, formed a limited partnership for the purpose of engaging in the stock brokerage
business in the state of Illinois (U.S.A.). It turned out that the
statute under which the firm was organized had been repealed
with the adoption of the Uniform Limited Partnership Act by
the State of Illinois. A and B had no knowledge of the repeal.
Subsequently, bankruptcy proceedings were instituted
against the firm and all the members, including the limited
partners.
Issue: Are the limited partners entitled to the benefits of
Section 11 (Art. 1852.) of the Act?
Held: Yes. Only the general partners could be adjudicated
bankrupt. (Giles vs. Vette, 263 U.S. 553 [1924].)
Status of heirs of a deceased general
partner admitted as partners.
An heir of a deceased general partner (in a general or
limited partnership), admitted as a partner under the articles
of partnership providing for such admission, ordinarily (not
necessarily) becomes a limited partner for his own protection,
because he would normally prefer to avoid any liability in excess
of the value of the estate inherited so as not to jeopardize his
personal assets.
298
PARTNERSHIP
Art. 1853
(1) Right to elect to become general partner may be exercised.
— This statutory limitation of responsibility being designed to
protect the heir, the latter may disregard it and instead elect to
become a collective or general partner, with all the rights and
privileges of one, and answering for the debts of the firm not only
with the inheritance but also with the heir’s personal fortune.
This choice pertains exclusively to the heir and does not require
the assent of the surviving partner or partners. (Goquiolay vs.
Sycip, 9 SCRA 663 [1963].)
(2) Right when given in articles of partnership may be waived.
— The articles of partnership may validly provide that in
the event of the death of a partner “the partnership shall be
continued and the deceased partner shall be represented by his
heirs and assignees in said partnership” as general partners. Of
course, the stipulation would not bind the heirs of the deceased
partner should they refuse to assume personal and unlimited
responsibility for the obligations of the firm. The heirs, in other
words, cannot be compelled to become general partners against
their wishes. But because they are not so compellable, it does not
follow that they may not voluntarily choose to become general
partners, waiving the protective mantle of the general laws of
succession. (Ibid.)
ART. 1853. A person may be a general partner and
a limited partner in the same partnership at the same
time, provided that this fact shall be stated in the certificate provided for in article 1844.
A person who is a general, and also at the same time
a limited partner shall have all the rights and powers
and be subject to all the restrictions of a general partner; except that, in respect to his contribution, he shall
have the rights against the other members which he
would have had if he were not also a general partner.
One person, both a general partner
and a limited partner.
A person may be a general and a limited partner at the same
time in the same partnership provided that this fact is stated in
Art. 1854
LIMITED PARTNERSHIP
299
the certificate signed, sworn to, and recorded in the Office of the
Securities and Exchange Commission. (see Art. 1845.)
Generally, his rights and powers are those of a general
partner. Hence, he is liable with his separate property to third
persons. (Art. 1816.) However, with respect to his contribution
as a limited partner, he would have the right of a limited partner
insofar as the other partners are concerned. (Arts. 1855-1858.)
This means that while he is not relieved from personal liability
to third persons for partnership debts, he is entitled to recover
from the general partners the amount he has paid to such third
persons; and in settling accounts after dissolution, he shall have
priority over general partners in the return of their respective
contributions. (Art. 1863.)
ART. 1854. A limited partner also may loan money to
and transact other business with the partnership, and,
unless he is also a general partner, receive on account of
resulting claims against the partnership, with general
creditors, a pro rata share of the assets. No limited partner shall in respect to any such claim:
(1) Receive or hold as collateral security any partnership property, or
(2) Receive from a general partner or the partnership any payment, conveyance, or release from liability,
if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons not
claiming as general or limited partners.
The receiving of collateral security, or a payment,
conveyance, or release in violation of the foregoing provisions is a fraud on the creditors of the partnership.
Loan and other business transactions
with limited partnership.
(1) Allowable transactions. — Under this article, a limited
partner (who is not also a general partner), being merely a
contributor to the partnership (see Art. 1866.) without the right
to participate in its management, is not prohibited from:
300
PARTNERSHIP
Art. 1854
(a) Granting loans to the partnership;
(b) Transacting other business with it; and
(c) Receiving a pro rata share of the partnership assets
with general creditors if he is not also a general partner.
(2) Prohibited transactions. — The limited partner, in respect
of any such claim, is, however, prohibited from:
(a) Receiving or holding as collateral security any
partnership property; or
(b) Receiving any payment, conveyance, or release from
liability if it will prejudice the right of third persons.
Any violation of the prohibition will give rise to the
presumption that it has been made to defraud partnership
creditors.
It should be emphasized that Article 1854 does not prohibit
absolutely the taking as collateral security by a limited partner
of any partnership property. Nos. (1) and (2) of Article 1854 are
modified by the requirement of sufficient assets to discharge the
obligation of the partnership when any payment or conveyance
is made or release is given to the limited partner by, or when he
receives security from, the partnership.
(3) Preferential rights of third persons. — In transacting business
with the partnership as a non-member, the limited partner is
considered as a non-partner creditor. However, third persons
always enjoy preferential rights insofar as partnership assets are
concerned (see Art. 1827.) in view of the natural tendency of the
partners to give preference to each other.
The rule is “designed to prevent illegal competition between
the limited partner and creditors of the partnership for the assets
of the partnership” in case there is insufficiency of partnership
assets with which to discharge partnership liabilities to nonpartner creditors. Such a competition is not a threat if the
partnership has sufficient assets to discharge its liabilities to nonmember creditors. (A.T.E. Financial Services, Inc. vs. Corson, 268
A. 2d 73.)
Art. 1855
LIMITED PARTNERSHIP
301
EXAMPLE:
A, B, and C are general partners with D as limited partner.
The total assets of the partnership amount to P200,000.00. The
partnership owes D P50,000.00 and E, a third party creditor,
P250,000.00.
Since the assets of the partnership are not sufficient to
discharge its liabilities to E, D cannot receive his claim of
P50,000.00 and payment to him will be presumed to have been
made to defraud E. It will likewise raise the same presumption
if D is the one indebted to the partnership and he is released
from liability.
D, however, is not prohibited from purchasing any
partnership property if the purpose is to generate cash with
which to pay off partnership obligations to third persons.
ART. 1855. Where there are several limited partners,
the members may agree that one or more of the limited
partners shall have a priority over other limited partners as to the return of their contributions, as to their
compensation by way of income, or as to any other matter. If such an agreement is made, it shall be stated in
the certificate, and in the absence of such a statement all
the limited partners shall stand upon equal footing.
Preferred limited partners.
By an agreement of all the members (general and limited
partners) stated in the certificate, priority or preference may be
given to some limited partners over other limited partners as to
the:
(1) return of their contributions;
(2) their compensation by way of income; or
(3) any other matter.
In the absence of such statement in the certificate, even if
there is an agreement, all the limited partners shall stand on
equal footing in respect of these matters.
302
PARTNERSHIP
Arts. 1856-1857
ART. 1856. A limited partner may receive from the
partnership the share of the profits or the compensation
by way of income stipulated for in the certificate; provided, that after such payment is made, whether from
the property of the partnership or that of a general partner, the partnership assets are in excess of all liabilities
of the partnership except liabilities to limited partners
on account of their contributions and to general partners.
Compensation of limited partner.
The right of the limited partner to receive his share of the
profits or compensation by way of income stipulated for in the
certificate is subject to the condition that partnership assets will
still be in excess of partnership liabilities after such payment. In
other words, third-party creditors have priority over the limited
partner’s rights.
In determining the liabilities of the partnership, the liabilities
to the limited partners for their contributions and to general
partners, whether for contributions or not, are not included. (see
Art. 1857.) Liabilities to limited partners other than on account
of their contributions arising from business transactions by them
with the partnership, enjoy protection, subject to the preferential
rights of partnership creditors. (see Art. 1854.)
ART. 1857. A limited partner shall not receive from a
general partner or out of partnership property any part
of his contributions until:
(1) All liabilities of the partnership, except liabilities
to general partners and to limited partners on account
of their contributions, have been paid or there remains
property of the partnership sufficient to pay them;
(2) The consent of all members is had, unless the
return of the contribution may be rightfully demanded
under the provisions of the second paragraph; and
(3) The certificate is cancelled or so amended as to
set forth the withdrawal or reduction.
Art. 1857
LIMITED PARTNERSHIP
303
Subject to the provisions of the first paragraph, a
limited partner may rightfully demand the return of his
contributions:
(1) On the dissolution of a partnership, or
(2) When the date specified in the certificate for its
return has arrived, or
(3) After he has given six months notice in writing
to all other members, if no time is specified in the certificate, either for the return of the contribution or for
the dissolution of the partnership.
In the absence of any statement in the certificate to
the contrary or the consent of all members, a limited
partner, irrespective of the nature of his contribution,
has only the right to demand and receive cash in return
for his contribution.
A limited partner may have the partnership dissolved and its affairs wound up when:
(1) He rightfully but unsuccessfully demands the
return of his contribution, or
(2) The other liabilities of the partnership have not
been paid, or the partnership property is insufficient for
their payment as required by the first paragraph, No. 1,
and the limited partner would otherwise be entitled to
the return of his contribution.
Requisites for return of contribution
of limited partner.
Under the first paragraph, the following conditions must
exist before the contribution of a limited partner can be returned
to him:
(1) All liabilities of the partnership have been paid or if
they have not yet been paid, the assets of the partnership are
sufficient to pay such liabilities. As in Article 1856, liabilities to
limited partners on account of their contributions and to general
partnership are not considered;
PARTNERSHIP
304
Art. 1857
(2) The consent of all the members (general and limited
partners) has been obtained except when the return may be
rightfully demanded; and
(3) The certificate is cancelled or so amended as to set forth
the withdrawal or reduction of the contribution.
EXAMPLE:
After operating for some time as a limited partnership,
X & Co., composed of A, B, and C, as general partners,
who contributed P30,000.00 each, and D and E, as limited
partners, who contributed P20,000.00 each, has a total assets of
P150,000.00 and the following liabilities:
(1) For return of contributions of limited
partners (D and E)....................................................
P40,000.00
(2) Due to third party credits .........................
50,000.00
(3) For loan extended by C .............................
25,000.00
(4) For loan extended by D ............................
35,000.00
(5) For taxes ......................................................
15,000.00
(6) For indemnity to B for damages
suffered in consequence of
management ...............................................
5,000.00
Total ............................................................. P170,000.00
May E legally demand the return of his contribution,
assuming that all the partners have given their consent and
are willing to have the certificate amended as to set forth the
withdrawal?
Yes. The total assets of P150,000.00 are well over the amount
of P100,000.00, the total of the liabilities mentioned in Nos. (2),
(4), and (5). The other liabilities are not considered in determining whether the contribution of E can be returned to him.
When return of contribution
a matter of right.
Under the second paragraph, the limited partner may demand, as a matter of right, the return of his contribution provided
Art. 1857
LIMITED PARTNERSHIP
305
the conditions in paragraph 1, Nos. 1 and 3 have been complied
with —
(1) On the dissolution of the partnership; or
(2) Upon the arrival of the date specified in the certificate for
the return; or
(3) After the expiration of the 6 months’ notice in writing
given by him to the other partners if no time is fixed in the
certificate for the return of the contribution or for the dissolution
of the partnership.
Right of limited partner to cash
in return for contribution.
Under the third paragraph, even if a limited partner has
contributed property, he has only the right to demand and
receive cash for his contribution. The exceptions are:
(1) When there is stipulation to the contrary in the certificate;
or
(2) Where all the partners (general and limited) consent to
the return other than in the form of cash.
When limited partner may have
partnership dissolved.
The fourth paragraph provides for additional grounds for the
dissolution of the partnership upon petition of a limited partner.
(See Arts. 1851[3], 1831.) They are:
(1) When his demand for the return of his contribution is
denied although he has a right to such return; or
(2) When his contribution is not paid although he is entitled
to its return because the other liabilities of the partnership have
not been paid or the partnership property is insufficient for their
payment. In other words, were it not for this first condition in
the first paragraph of Article 1857 which is not present, he would
have been entitled to the return of his contribution because of the
presence of the second and third conditions.
The limited partner must first ask the other partners to have
the partnership dissolved; if they refuse, then he can seek the
dissolution of the partnership by judicial decree.
306
PARTNERSHIP
Art. 1858
ART. 1858. A limited partner is liable to the partnership:
(1) For the difference between his contribution as
actually made and that stated in the certificate as having
been made, and
(2) For any unpaid contribution which he agreed in
the certificate to make in the future at the time and on
the conditions stated in the certificate.
A limited partner holds as trustee for the partnership:
(1) Specific property stated in the certificate as
contributed by him, but which was not contributed or
which has been wrongfully returned, and
(2) Money or other property wrongfully paid or
conveyed to him on account of his contribution.
The liabilities of a limited partner as set forth in this
article can be waived or compromised only by the consent of all members; but a waiver or compromise shall
not affect the right of a creditor of a partnership who
extended credit or whose claim arose after the filing and
before a cancellation or amendment of the certificate, to
enforce such liabilities.
When a contributor has rightfully received the return in whole or in part of the capital of his contribution, he is nevertheless liable to the partnership for any
sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return.
Liabilities of a limited partner.
(1) To the partnership. — As limited partners are not principals
in the transaction of a partnership, their liability, as a rule, is to the
partnership (Art. 1858.), not to the creditors of the partnership.
(see Art. 1866.) The general partners cannot, however, waive any
liability of the limited partners to the prejudice of such creditors.
(Sec. 17, Commissioners’ Note, 8 Uniform Laws Annotated, p. 5.)
Art. 1858
LIMITED PARTNERSHIP
307
(2) To partnership creditors and other partners. — A limited
partner is liable for partnership obligations when he contributes
services instead of only money or property to the partnership
(Art. 1845.); when he allows his surname to appear in the firm
name (Art. 1846.); when he fails to have a false statement in the
certificate corrected, knowing it to be false (Art. 1847); when he
takes part in the control of the business (Art. 1848.); when he
receives partnership property as collateral security, payment,
conveyance, or release in fraud of partnership creditors (Art.
1854); and when there is failure to substantially comply with
the legal requirements governing the formation of limited
partnerships. (Art. 1844, par. 2.)
(3) To separate creditors. — As in a general partnership, the
creditor of a limited partner may, in addition to other remedies
allowed under existing laws, apply to the proper court for a
“charging order” subjecting the interest in the partnership of the
debtor partner for the payment of his obligation. (Art. 1862.)
Liability for unpaid contribution.
Under the first paragraph of Article 1858, the limited partner
is liable not only for the difference between the amount of his
actual contributions and that stated in the certificate as having
been made but also for any unpaid contribution he agreed to
make at a future time.
EXAMPLE:
A and B are limited partners in a partnership. In the certificate of partnership, it appears that A contributed P10,000.00.
Actually, he contributed only P8,000.00. In the certificate too, B
promised to give an additional contribution of P4,000.00 at a
specified date.
So, A should pay the difference of P2,000.00 and B, the
amount of P4,000.00 on the date specified or now, if the date
has arrived.
Liability as trustee.
Under the second paragraph of Article 1858, a limited partner
is considered as trustee for the partnership for:
PARTNERSHIP
308
Art. 1858
(1) Specific property stated in the certificate as contributed
by him but which he had not contributed;
(2) Specific property of the partnership which had been
wrongfully returned to him;
(3) Money wrongfully paid or conveyed to him on account
of his contribution; and
(4) Other property wrongfully paid or conveyed to him on
account of his contribution.
Requisites for waiver or compromise
of liabilities.
Under the third paragraph of Article 1858, the liabilities of a
limited partner may be waived or compromised, provided:
(1) The waiver or compromise is made with the consent of
all the partners; and
(2) The waiver or compromise does not prejudice partnership
creditors who extended credit or whose claims arose before the
cancellation or amendment of the certificate.
EXAMPLE:
In the preceding illustration, suppose after the liabilities of
A and B were waived or compromised with the consent of all
the partners, X extended credit to the partnership. Later on, the
certificate was amended to set forth the necessary change.
Here, the credit was extended after the filing but before
the amendment of the certificate. If the remaining assets are
insufficient, X can still enforce the liabilities of A and B.
Liability for return of contribution
lawfully received.
Under the fourth paragraph of Article 1858, the limited
partner is liable to the partnership for the return of contribution
lawfully received by him (see Art. 1857.) to pay creditors who
extended credit or whose claim arose before such return. His
liability, of course, cannot exceed the sum received by him (Art.
1843.) with interest.
Art. 1859
LIMITED PARTNERSHIP
EXAMPLE:
Suppose that A lawfully received the return of his contribution in the amount of P10,000.00 on the date specified in the
certificate. Subsequently, the partnership became liable to X.
In this case, if the assets of the partnership are insufficient,
the claim of X should be directed against the general partners.
But if X extended credit or his claim arose before A received the
return of his contribution, then, A is liable to the partnership.
Thus, if the partnership needs P7,000.00 to discharge the
liabilities to X, then A is liable for the said amount plus interest.
But in no case is A liable beyond P10,000.00 plus interest
because he is only a limited partner.
ART. 1859. A limited partner’s interest is assignable.
A substituted limited partner is a person admitted
to all the rights of a limited partner who has died or has
assigned his interest in a partnership.
An assignee, who does not become a substituted
limited partner, has no right to require any information
or account of the partnership transactions or to inspect
the partnership books; he is only entitled to receive the
share of the profits or other compensation by way of
income, or return of his contribution, to which his assignor would otherwise be entitled.
An assignee shall have the right to become a substituted limited partner if all the members consent thereto
or if the assignor, being thereunto empowered by the
certificate, gives the assignee that right.
An assignee becomes a substituted limited partner
when the certificate is appropriately amended in accordance with article 1865.
The substituted limited partner has all the rights
and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities of which
he was ignorant at the time he became a limited partner
and which could not be ascertained from the certificate.
309
310
PARTNERSHIP
Art. 1859
The substitution of the assignee as a limited partner
does not release the assignor from liability to the partnership under articles 1847 and 1858.
Effect of change in the relation
of limited partners.
The substitution of a person as a limited partner in place of
an existing limited partner (Art. 1859.), or the withdrawal, death,
insolvency, insanity, or civil interdiction of a limited partner (Art.
1860.), or the addition of new limited partners (Art. 1849.) does
not necessarily dissolve the partnership.
No limited partner, however, can withdraw his contribution
until all liabilities to creditors are paid. (see Art. 1857.)
Rights of assignee of limited partner.
A limited partner may assign his interest in the partnership
to another person. The assignee is only entitled to receive the
share of the profits or other compensation by way of income
or the return of the contribution to which the assignor would
otherwise be entitled. His rights are similar to those of a person to
whom a partner conveyed his whole interest in the partnership.
(Art. 1813.) Hence, he has no right to require any information or
account of partnership transactions or to inspect the partnership
books.
The assignee acquires all the rights of the limited partner
only when he becomes a substituted limited partner.
When assignee may become substituted
limited partner.
A substituted limited partner is a person admitted to all the
rights of a limited partner who has died or has assigned his
interest in a partnership. The following are the requisites in order
that the assignee may become a substituted limited partner:
(1) All the members must consent to the assignee becoming
a substituted limited partner or the limited partner, being
empowered by the certificate, must give the assignee the right to
become a limited partner;
Art. 1860
LIMITED PARTNERSHIP
311
(2) The certificate must be amended in accordance with
Article 1865; and
(3) The certificate as amended must be registered in the
Securities and Exchange Commission.
Liability of substituted partner
and assignor.
It must be observed that the substituted limited partner is
liable for all the liabilities of his assignor except only those of
which he was ignorant at the time he became a limited partner
and which could not be ascertained from the certificate. Similarly,
the assignor is not released from liability to persons who suffered
damage by reliance on a false statement in the certificate (Art.
1847.) and to creditors who extended credit or whose claims
arose before the substitution. (Art. 1858.)
ART. 1860. The retirement, death, insolvency, insanity, or civil interdiction of a general partner dissolves
the partnership, unless the business is continued by the
remaining general partners:
(1) Under the right so to do stated in the certificate,
or
(2) With the consent of all the members.
Effect of retirement, death, etc.
of a general partner.
The retirement or withdrawal, death, insolvency, insanity, or
civil interdiction of a general partner dissolves the partnership
(see Art. 1830.), while any of such causes affecting a limited
partner (see Art. 1861.) does not result in its dissolution unless,
of course, there is only one limited partner. (see Art. 1843.)
If the business is continued by the remaining partners
under the rights given in the certificate or with the consent of
all the members, the limited partnership is not dissolved but
the certificate must be amended as required by Article 1864,
paragraph 2, No. (5) to reflect the change in order that the limited
312
PARTNERSHIP
Arts. 1861-1862
partners may avail of the protection granted by law. (Lowe vs.
Arizona Power & Light Co., 427 P.d. 366.)
ART. 1861. On the death of a limited partner, his
executor or administrator shall have all the rights of a
limited partner for the purpose of settling his estate,
and such power as the deceased had to constitute his
assignee as substituted limited partner.
The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner.
Right of executor on death
of a limited partner.
On the death of a limited partner, his executor or administrator
shall acquire all the rights for purposes of settling the affairs of
the limited partner (see Art. 1851.) and the right to constitute
the deceased’s assignee as substituted limited partner. Note that
the executor or administrator may constitute the assignee as a
substituted limited partner only if the deceased partner was
empowered to do so in the certificate. (Art. 1859, par. 4.)
Under the second paragraph, the estate of the deceased
limited partner is liable for all his liabilities contracted while he
was a limited partner. (see Art. 1858.)
ART. 1862. On due application to a court of competent jurisdiction by any creditor of a limited partner, the
court may charge the interest of the indebted limited
partner with payment of the unsatisfied amount of such
claim, and may appoint a receiver, and make all other
orders, directions, and inquiries which the circumstances of the case may require.
The interest may be redeemed with the separate
property of any general partner, but may not be redeemed with partnership property.
The remedies conferred by the first paragraph shall
not be deemed exclusive of others which may exist.
Nothing in this Chapter shall be held to deprive a
limited partner of his statutory exemption.
Art. 1863
LIMITED PARTNERSHIP
313
Rights of creditors of limited partner.
The creditor of a limited partner may apply to the proper
court for an order charging the limited partner’s interest in the
partnership for the payment of any unsatisfied amount of his
claim. The interest so charged may be redeemed with the separate property of any general partner but not with partnership
property.
Under Article 1814, paragraph 2, No. (1), the interest of the
debtor partner charged with the payment of the unsatisfied
amount of the judgment debt may be redeemed with partnership
property with the consent of all the partners whose interests are
not so charged.
The limited partner’s right under the exemption laws is also
preserved under this article since his interest in the partnership
(see Art. 1812.) is actually his property.
ART. 1863. In settling accounts after dissolution the
liabilities of the partnership shall be entitled to payment in the following order:
(1) Those to creditors, in the order of priority as
provided by law, except those to limited partners on
account of their contributions, and to general partners;
(2) Those to limited partners in respect to their
share of the profits and other compensation by way of
income on their contributions;
(3) Those to limited partners in respect to the capital of their contributions;
(4) Those to general partners other than for capital
and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and
314
PARTNERSHIP
Art. 1863
in respect to their claims for profits or for compensation
by way of income on their contribution respectively, in
proportion to the respective amounts of such claims.
Dissolution of a limited partnership.
(1) Causes. — A limited partnership is dissolved in much the
same way as an ordinary partnership. It may be dissolved for
the misconduct of a general partner, for fraud practiced on the
limited partner by the general partner (68 C.J.S. 1042.), or on the
retirement, death, etc. of a general partner (Art. 1860.), or when
all the limited partners ceased to be such (Art. 1864, par. 1.), or on
the expiration of the term for which it was to exist (Art. 1844[1,
e].), or by mutual consent of the partners before the expiration of
the firm’s original term.
(2) Suit for dissolution. — A limited partner may bring a suit for
the dissolution of the firm, an accounting, and the appointment
of a receiver when the misconduct of a general partner or the
insolvency of the firm warrants it. Similarly, creditors of a limited
partnership are entitled to such relief where the firm is insolvent.
(68 C.J.S. 1044-1045.)
A limited partner may have the partnership dissolved and
its affairs wound up when he rightfully but unsuccessfully
demands the return of his contribution, or the other liabilities
of the partnership, except liabilities to general partners and to
limited partners on account of their contributions, have not been
paid, or the partnership property is insufficient for their payment,
and the limited partner would otherwise be entitled to the return
of his contribution. (Art. 1857, par. 4; see Arts. 1830-1831.)
(3) Notice of dissolution. — When the firm is dissolved by
the expiration of the term fixed in the certificate, notice of the
dissolution need not be given since the papers filed and recorded
in the Securities and Exchange Commission are notice to all
the world of the term of the partnership. Where, however, the
dissolution is by the express will of the partners, the certificate
shall be cancelled, and a dissolution of the partnership is not
effected until there has been compliance with the requirement in
this respect.
Art. 1863
LIMITED PARTNERSHIP
315
(4) Winding up. — The consequences of the dissolution of a
general partnership apply to limited partnership. Therefore, the
partnership continues in operation while winding up.
When a limited partnership has been duly dissolved, the
general partners have the right and power to wind up its affairs,
as in a general partnership. It is not the duty of the limited
partner or of the representative of a deceased limited partner
to care for or collect the assets of the firm. (68 C.J.S. 1043.) The
representatives of the general partners, not the limited partners,
succeed the general partners.
Priority in the distribution
of partnership assets.
Article 1863 expressly provides for priority in the distribution
of the assets after dissolution. The partnership liabilities shall be
settled in the following order:
(1) Those due to creditors, including limited partners, except
those on account of their contributions, in the order of priority as
provided by law (Arts. 1854, 1856, 1857[1].);
(2) Those due to limited partners in respect to their share of
the profits and other compensation by way of income on their
contributions;
(3) Those due to limited partners for the return of the capital
contributed;
(4) Those due to general partners other than for capital and
profits;
(5) Those due to general partners in respect to profits; and
(6) Those due to general partners for the return of the capital
contributed.
Partnership creditors are entitled to first distribution, followed by limited partners who take priority over general partners.
Note that in a general partnership, the claims of the general
partners in respect of capital enjoy preference over those in
respect of profits. (see Art. 1839[1, c, d].)
316
PARTNERSHIP
Art. 1864
Share of limited partners in partnership
assets.
In the absence of any statement in the certificate as to the share
of the profits which each partner shall receive by reason of his
contribution (Art. 1844, par. 1[1].) and subject to any subsequent
agreement, limited partners share in the partnership assets in
respect to their claims for capital and profits in proportion to the
respective amounts of such claims.
This proportional sharing by the limited partners takes place
where the partnership assets are insufficient to pay such claims.
Priority of claims of limited partners.
The members of a limited partnership, as among themselves,
may include in the partnership articles an agreement for priority
of distribution on the winding up of partnership affairs. (68
C.J.S. 1024.) Such agreement ordinarily becomes controlling as
between the partners themselves. (Ibid., 1043.) In the absence
of any contrary agreement, all the limited partners stand upon
equal footing.
The claims of limited partners for profits and other compensation by way of income and return of capital contributions rate
ahead with respect to all claims of general partners. For claims
arising from individual loans to, or other business transactions
with, the partnership, other than for capital contributions, the
limited partner is placed in the same category as a non-member
creditor. (Art. 1854, par. 1.) If return is made to a limited partner
of his contribution before creditors are paid, he is under an obligation to reimburse such payments, with interest, so far as necessary to satisfy the claims of creditors. (see Art. 1858, last par.)
In the event of insolvency of the partnership, its creditors
take preference over both general and limited partners.
ART. 1864. The certificate shall be cancelled when
the partnership is dissolved or all limited partners cease
to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership
Art. 1864
LIMITED PARTNERSHIP
317
or in the amount or character of the contribution of any
limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and
the business is continued under article 1860;
(6) There is change in the character of the business
of the partnership;
(7) There is a false or erroneous statement in the
certificate;
(8) There is a change in the time as stated in the certificate for the dissolution of the partnership or for the
return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having
been specified in the certificate; or
(10) The members desire to make a change in any
other statement in the certificate in order that it shall
accurately represent the agreement among them.
When certificate shall be cancelled
or amended.
(1) The certificate shall be cancelled, not merely amended:
(a) When the partnership is dissolved other than by reason of the expiration of the term of the partnership; or
(b) When all the limited partners cease to be such. A
limited partnership cannot exist as such if there are no more
limited partners. (Art. 1843.)
(2) In all other cases, only an amendment of the certificate is
required. (Art. 1864, Nos. 1-10.)
318
PARTNERSHIP
Art. 1865
ART. 1865. The writing to amend a certificate shall:
(1) Conform to the requirements of article 1844 as
far as necessary to set forth clearly the change in the
certificate which it is desired to make; and
(2) Be signed and sworn to by all members, and an
amendment substituting a limited partner or adding a
limited or general partner shall be signed also by the
member to be substituted or added, and when a limited
partner is to be substituted, the amendment shall also
be signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by
all members.
A person desiring the cancellation or amendment of
a certificate, if any person designated in the first and
second paragraphs as a person who must execute the
writing refuses to do so, may petition the court to order
a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have
the writing executed by a person who refuses to do so,
it shall order the Office of the Securities and Exchange
Commission where the certificate is recorded, to record
the cancellation or amendment of the certificate; and
when the certificate is to be amended, the court shall
also cause to be filed for record in the said office a
certified copy of its decree setting forth the amendment.
A certificate is amended or cancelled when there
is filed for record in the Office of the Securities and
Exchange Commission, where the certificate is recorded:
(1) A writing in accordance with the provisions of
the first or second paragraph; or
(2) A certified copy of the order in accordance with
the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with this article, the amended certificate shall
thereafter be for all purposes the certificate provided
for in this Chapter.
Art. 1866
LIMITED PARTNERSHIP
319
Requirements for amendment and
cancellation of certificate.
(1) The following are the requirements to amend a certificate:
(a) The amendment must be in writing;
(b) It must be signed and sworn to by all the members
including the new members, and the assigning limited partner in case of substitution or addition of a limited or general
partner; and
(c) The certificate, as amended, must be filed for record
in the Securities and Exchange Commission.
From the moment the amended certificate or a certified copy
of a court order granting the petition for amendment has been
filed, such amended certificate shall thereafter be for all purposes
the certificate of the partnership under Article 1844.
(2) The cancellation of a certificate must also be in writing
and signed by all the members and filed with the Office of the
Securities and Exchange Commission. If the cancellation is
ordered by the court, certified copy of such order shall be filed
with the Commission.
The approval by the Commission of the amendment or cancellation is not required.
ART. 1866. A contributor, unless he is a general partner, is not a proper party to proceedings by or against
a partnership, except where the object is to enforce a
limited partner’s right against or liability to the partnership.
Limited partner, a mere contributor.
A limited partner is referred to in Article 1866 as mere
contributor. (see also Arts. 1846, 1848, 1854, 1857, 1858, 1860.) He
is practically a stranger in the limited partnership whose liability
is limited to his interest in the firm (Art. 1843.), without any right
and power to participate in the management and control of the
business. (see Arts. 1848, 1851.)
320
PARTNERSHIP
Art. 1866
Unlike in the case of a general partner, the relationship
between a limited partner, on the one hand, and the other partners
and the partnership, on the other hand, is not one of trust and
confidence. A limited partner is, therefore, not prohibited from
engaging in business for himself even in competition with that
conducted by the partnership (see Arts. 1789, 1808.) and may
transact business with the partnership for ordinary purposes as
though he were a stranger. (see Art. 1854.)
Parties to action by or against
partnership.
Since limited partners are not principals in partnership
transactions, their liability, as a general rule, is to the partnership,
not to the creditors of the partnership. (see Art. 1858.) For the
same reason, they have no right of action against third persons
against whom the partnership has any enforceable claim.
Hence, unless a limited partner is also a general partner, or
has become liable as a general partner, he is not a proper party to
proceedings by or against the partnership.
When limited partner a proper party.
(1) The limited partner may maintain an action in his own
name where the object is to enforce his individual rights against
the partnership (Art. 1851.), and to recover damages for violation
of such right. Similarly, he is a proper party to a proceeding to
enforce his liability to the partnership. (Art. 1858.)
(2) An action at law may be maintained by creditors of a
firm against a limited partner to account for and restore sums
withdrawn by him from the capital of the firm with outstanding
debts on a voluntary dissolution. But there is authority that
such relief against limited partners who have withdrawn their
contributions from an insolvent firm on dissolution is confined
to judgment creditors of the firm with unsatisfied executions
against the general partners, and this remedy has been denied to
creditors who have not exhausted their remedies at law against
the general partners. (68 C.J.S. 1045-1046.)
Art. 1867
LIMITED PARTNERSHIP
321
Nature of limited partner’s interest
in firm.
(1) A loan of money to a person engaged in business, under
a detailed agreement for its payment and security, does not
constitute a limited partnership. Conversely, the limited partner’s
contributions to the firm is not a loan, and he is not a creditor of the
firm because of his contribution thereto.
(2) A limited partner’s contribution is not a mere investment,
as in the case of one purchasing stock in a corporation.
(3) A limited partner is, in a sense, an owner, which in interest
in the capital of the firm and its business as such, but he has
no property right in the firm’s assets. He is not the owner of the
property of the partnership any more than are the stockholders
in the corporation; but in accordance with statutory provisions,
a limited partner may be a co-owner with his partners of partnership
property, holding as a tenant in partnership and his interest may
be defined as a tenancy in partnership.
(4) A limited partner’s interest is in personal property, and it is
immaterial whether the firm’s assets consist of realty or tangible
or intangible personalty.
(5) The nature of the limited partner’s interest in the firm
amounts to a share in the partnership assets after its liabilities have
been deducted and a balance struck. This interest is a chose in
action, and hence, intangible personal property. (68 C.J.S. 10221023.)
ART. 1867. A limited partnership formed under the
law prior to the effectivity of this Code, may become a
limited partnership under this Chapter by complying
with the provisions of Article 1844, provided the certificate sets forth:
(1) The amount of the original contribution of each
limited partner, and the time when the contribution
was made; and
(2) That the property of the partnership exceeds
the amount sufficient to discharge its liabilities to persons not claiming as general or limited partners by an
322
PARTNERSHIP
Art. 1867
amount greater than the sum of the contributions of its
limited partners.
A limited partnership formed under the law prior to
the effectivity of this Code, until or unless it becomes a
limited partnership under this Chapter, shall continue
to be governed by the provisions of the old law.
Provisions for existing limited
partnerships.
A limited partnership formed under the former law (Articles
145-150, Code of Commerce.) may become a limited partnership
under Chapter 4 by complying with the provisions of Article
1844, provided the certificate sets forth the information required
by Article 1867. Until or unless it becomes a limited partnership
under this chapter, it shall continue to be governed by the
provisions of the old law.
By way of illustration, the requisite in No. (2) is satisfied
by a limited partnership formed under the old law, with assets
worth P100,000.00, liabilities to third persons in the amount of
P70,000.00, and to limited partners on account of their contributions in the amount of P20,000.00, the difference of P30,000.00
being greater than the sum of P20,000.00; but if such difference
is only P20,000.00 or less, it cannot become a limited partnership
under the Code.
— oOo —
323
PART II
TITLE X
AGENCY
(Arts. 1868-1932)
Chapter 1
NATURE, FORM, AND KINDS
OF AGENCY
ARTICLE 1868. By the contract of agency a person
binds himself to render some service or to do something in representation or on behalf of another, with the
consent or authority of the latter. (1709a)
Concept of agency.
Article 1868 defines the contract of agency. The definition,
which is very broad enough to include all situations in which
one person is employed to render service for another, excludes,
however, from its concept the relationship of employer and
employee (Art.* 1700.), of master and servant (Art. 1680.), and of
employer and independent contractor. (Art. 1713.)
Agency is a fiduciary relationship which implies a power in
an agent to contract with a third person on behalf of a principal.
It is this power to effect the principal’s contractual relations with
*Unless otherwise indicated, refers to article in the Civil Code.
323
AGENCY
324
Art. 1868
third persons that differentiates the agent from the employee, the
servant, and the independent contractor.
Agency, properly speaking, relates to commercial or business
transactions. Agency relationship may also arise in non-business
situations, as for example, a person returns an article to a lender
for a borrower-friend.
EXAMPLE:
P, owner of a land, wants to construct a building on it. He
may do any of the following:
(1) He may hire C, a building contractor, to construct the
building with the materials and labor to be furnished by C; or
(2) He himself may construct the building, buying the
necessary materials and employing W, etc. (workers) who shall
construct the building under his direction and supervision; or
(3) He may secure the services of A to supervise and to act
for him in all matters connected with the construction work.
In the first case, C is an independent contractor; in the
second, W, etc. are workers or employees of P, and in the third,
A is an agent of P. Thus, the relationship between the parties
— the hirer of service and the person whose service has been
hired — and their rights and duties will depend upon the terms
under which one works, represents, or acts for another.
Governing law.
As in the case of sales, partnership, loan, deposit, and
guaranty, a distinction formerly existed under our law between
civil agency and commercial agency. The former was governed
by the Civil Code, the latter, by the Code of Commerce. This
distinction has been abolished under the new Civil Code. (Art.
2270[2].)
At present, all agencies are governed by the Civil Code. (Arts.
1868-1932.)
Term used in other senses.
“Agency” is sometimes used in a sense other than to denote
the relationship of principal and agent.
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
325
(1) Thus, it may be used to denote the place at which the
business is transacted. When used in the sense of place of business,
the relationship of principal and agent is not necessarily implied.
(2) Likewise, the term may be used in the sense of instrumentality by which a thing is done. (2 C.J. 1024.)
(3) It is also used to refer to the exclusive right of a person to
sell a product of another in a specific territory.
Characteristics of a contract
of agency.
The contract of agency is:
(1) consensual, because it is based on the agreement of the
parties which is perfected by mere consent;
(2) principal, because it can stand by itself without need of
another contract;
(3) nominate, because it has its own name;
(4) unilateral, if it is gratuitous because it creates obligations
for only one of the parties, i.e., the agent; or bilateral, if it is for
compensation because it gives rise to reciprocal rights and
obligations; and
(5) preparatory, because it is entered into as a means to an
end, i.e., the creation of other transactions or contracts.
Nature, basis, and purpose
of agency.
The word “agency” when used in its broadest meaning is
both a contract and a representative relation.
(1) Nature. — Since agency is a contract, it is essential that
the minds of the parties should meet in making it. Article 1868
defines agency from the viewpoint of a contract.
(a) Manifestation of consent. — The principal must intend
that the agent shall act for him, the agent must intend to
accept the authority and act on it, and such intention of the
parties must find expression either in words or conduct
between them. Without such intention, there is generally
326
AGENCY
Art. 1868
no agency. Thus, the mere fact that an entity may be 100%
subsidiary corporation of another corporation does not
necessarily mean that the former is a duly authorized agent
of the latter because it is essential, for a contract of agency
to exist, that the principal consents that the other party, the
agent, shall act on its behalf and the agent consents so as to
act. (Apex Mining Co., Inc. vs. Southeast Mindanao Gold
Mining Corp., 492 SCRA 355 [2006].)
(b) Agent, by legal fiction, becomes principal. — In acting for
the principal, the agent, by legal fiction, becomes the principal
authorized to perform all acts which the latter would have
him do. Such a relationship can only be effected “with the
consent or authority” of the principal which cannot, in any
way be compelled by law or by any court. (Orient Air Services
& Hotel Representatives vs. Court of Appeals, 197 SCRA 645
[1991].)
(c) Presence/absence of contract or consideration. — Although
the agency relationship is usually a contractual one, either
express or implied, based upon a consideration (see Art.
1875.), this is not necessarily so; that is, the relationship may
be created by operation of law (e.g., agency by estoppel, infra.;
see Arts. 1881, 1882, 1884, par. 2, 1885, 1929, 1931, 1932.),
or a person who acts for another as principal may do so
gratuitously. (3 Am. Jur. 2d 419-420.) Thus, without a contract
or a consideration there can be an agency or agency powers.
In the exercise of governmental functions, local governments
or municipal corporations act as agents for the sovereign
state. The legal consequences of agency may attach where
one person acts for another without authority or in excess of
his authority, and the latter subsequently ratifies it. (see Arts.
1881-1882.)
(2) Basis. — Agency is also a representative relation. The
agent renders some service or does something “in representation
or on behalf of another.” (Art. 1868.)
(a) Personal contract of representation. — Representation
constitutes the basis of agency. As it is a personal contract
of representation based on trust and confidence reposed by
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
327
the principal on his agent, agency is generally revocable. (see
Arts. 1920, 1927.)
(b) Acts of agents, by legal fiction, acts of principal. — The
acts of the agent on behalf of the principal within the scope of
his authority (Art. 1881.) produce the same legal and binding
effects as if they were personally done by the principal.
The distinguishing features of agency are its representative
character and its derivative authority. (2 C.J.S. 1026.) “He who
acts through another acts himself’’ or “He who does a thing
by an agent is considered as doing it himself.” By this legal
fiction, the actual or real absence of the principal is converted
into his legal or juridical presence. (Rallos vs. Felix Go Chan
& Sons Realty Corp., 18 SCRA 251 [1978]; see Bordador vs.
Luz, 283 SCRA 374 [1997].; Eurotech Industrial Technologies,
Inc. vs. Cuizon, 521 SCRA 584 [2007].)
Thus, a person may make an offer to enter into a contract
through an agent and such offer is accepted from the time acceptance is communicated to the agent who is deemed authorized to
receive the acceptance. (Art. 1322.) Applying the same principle,
where an agent purchased property in bad faith, the principal
should also be deemed a purchaser in bad faith. (Caram, Jr. vs.
Laureta, 103 SCRA 7 [1981].) Notice to the agent is, to all legal intents and purposes, notice to the principal. (Air France vs. Court
of Appeals, 126 SCRA 448 [1983].)
(3) Purpose. — The purpose of agency is to extend the personality of the principal through the facility of the agent. (see
Orient Air Service & Hotel Representatives vs. Court of Appeals,
supra.) to render some service to do or something. It enables the
activity of man which is naturally limited in its exercise by the
impositions of his physiological conditions to be legally extended
by permitting him to be constructively present in many different
places and to perform diverse juridical acts and carry on many
different activities through another when physical presence is
impossible or inadvisable at the same time. (see 11 Manresa 434.)
With the expansion of commercial transactions and the consequent increase in business organizations conducted mainly
through the combined efforts of individuals acting in a represen-
AGENCY
328
Art. 1868
tative capacity, the subject of agency has grown in importance.
(see Teller, Agency, 1948 ed., p. 2.)
The usefulness of the agency relationship in business transactions is obvious. In fact, with very few exceptions, a single individual will find it being difficult, if not impossible, to perform
every act required to manage a business enterprise. Furthermore,
many business enterprises are organized as corporations which
can only act through agents.
Parties to the contract.
The two parties to the contract are the:
(1) Principal. — one whom the agent represents and from
whom he derives his authority (2 C.J.S. 1024.); he is the person
represented. Agency imports the contemporaneous existence of
a principal, and there is no agency unless one is acting for and in
behalf of another (2-A Words and Phrases 436.); and
(2) Agent. — one who acts for and represents another; he
is the person acting in a representative capacity. The agent has
derivative authority in carrying out the principal’s business. He
may employ his own agent in which case he becomes a principal
with respect to the latter. (see Art. 1892.) If an act done by one
person in behalf of another is, in its essential nature, one of
“agency,” the former is “agent” of the latter notwithstanding that
he is not so called. (2-A Words and Phrases 436.)
From the time the agent acts or transacts the business for
which he has been employed in representation of another, a third
party is added to the agency relationship — the party with whom
the business is transacted.
Essential elements of agency.
They are as follows:
(1) There is consent, express or implied, of the parties to
establish the relationship;
(2) The object is the execution of a juridical act in relation to
third persons;
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
329
(3) The agent acts as a representative and not for himself;1
and
(4) The agent acts within the scope of his authority. (Rallos
vs. Felix Go Chan & Sons Realty Corp. and Court of Appeals, 81
SCRA 251 [1978]; Tuazon vs. Heirs of B. Ramos, 463 SCRA 408
[2005].)
In addition, the parties must be competent to act as principal
and agent. (infra.) Consideration is not required.
An agency relationship is consensual in nature. It is based
on the concept that the parties mutually agree on its creation. A
person may express his consent by contract (Art. 1868.), orally
or in writing, by conduct (Art. 1869.), or by ratification (see Art.
1910.), or the consent may arise by presumption or operation
of law. In certain situations, the law presumes that a person
has authority to act for another. For example, in law, partners
are considered agents of the partnership and of each other. (Art.
1818.)
Relationship of third party with
principal and agent.
(1) Since an agent’s contract is not his own but his principal’s,
a third party’s liability on such contract is to the principal and
not to the agent, and liability to such third party is enforceable
against the principal, not the agent.
(2) Where an agency exists, the relationship of the third party
with whom the agent has contracted, to the principal, is the same
as that in a contract in which there is no agent.
(a) Normally, the agent has neither rights nor liabilities
as against the third party. He cannot sue or be sued on the
contract. Since a contract may be violated only by the parties
1
Where the money used by a person to discharge the debtor’s obligation rightfully
belonged to the debtor, the payor cannot be considered a third party payor under Article
1302(2), which provides: “It is presumed that there is legal subrogation: x x x (2) When a
third person, not interested in the obligation, pays with the express or tacit approval of
the debtor x x x” but a conduit or merely an agent as defined in Article 1868. (Chemphil
Export & Import Corp. vs. Court of Appeals, 251 SCRA 257 [1996].)
AGENCY
330
Art. 1868
thereto as against each other, the real party-in-interest, either
as plaintiff or defendant in an action upon that contract must,
generally, be a party to said contract.2
The legal situation is, however, different where an agent
is constituted as an assignee. In such a case, the agent may,
in his own behalf, sue on a contract made for his principal,
as an assignee of such contract. (Angeles vs. Phil. National
Railways, 500 SCRA 444 [2006].)
(b) The fact that the agent did not obtain his commissions
or recoup his advances because of the non-performance of
the contract does not entitle him to file an action against
the buyer where he does not appear as a beneficiary of a
stipulation pour autrui under Article 13113 of the Civil Code.
(Uy vs. Court of Appeals, 314 SCRA 69 [1999].)
(c) An agent, in his own behalf, may, however, bring an
action founded on a contract made for his principal as an
assignee of such contract. The rule requiring every action
to be prosecuted in the name of the real party-in-interest
recognizes the assignments of rights of action and also
recognizes that when one has a right assigned to him, he is
then the real party-in-interest and may maintain an action
upon such claim or right. (Ibid.)
Capacity of the parties.
(1) Principal. — A principal must be capacitated (see Arts.
1327, 1329.4) or have the legal capacity to enter into contract in his
2
In a foreclosure of a mortgage undertaken by an attorney-in-fact (agent) for his
principal (mortgagee), the validity of a loan contract entered into between the mortgagee
and the mortgagor cannot be raised against the agent as the matter is solely between his
principal and the other party (mortgagor) to the contract. (Philipine National Bank vs.
Ritratto Group, Inc., 362 SCRA 216 [2001].)
3
Art. 1311. x x x
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.
(1257a)
4
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
331
own right. The logic is simple. A person who cannot legally enter
into contracts directly should not be permitted to do it indirectly
through another.
(a) The principal may be either a natural person or an
artificial one. Thus, legal entities such as corporations and
partnerships can be principals or agents. This is expressly
recognized in Article 1919(4) which provides as one of the
grounds for the extinguishment of agency “the dissolution
of the firm or corporation which entrusted or accepted
the agency.” On the other hand, a voluntary association of
persons which is not a legal entity has no legal existence and
cannot sue or be sued; hence, it has no capacity to appoint an
agent.
(b) Also, during the existence of a state of war, an enemy
alien may not appoint an agent to act in the belligerent
territory with which his nation is at war. (3 Am. Jur. 2d 424.)
(c) Inasmuch as one who acts through an agent in law
does the act himself, the capacity to act by an agent depends in
general on the capacity of the principal to do the act himself if
he were present. (2 C.J.S. 1040.) It is a general rule that an agent
who assumes to contract in the name of a principal without
contractual capacity renders himself liable to third persons.
The acts of an agent done for an incompetent principal may
be ratified by the latter after he acquires capacity. The agent is
not liable where he was ignorant of the principal’s incapacity.
EXAMPLE:
A, agent, makes a contract on behalf of P without knowledge
that P was a minor. P thereafter disaffirmed the contract.
Is A liable to the other party to the contract?
(2)
(1263a)
Insane or demented persons, and deaf-mutes who do not know how to write.
xxx
xxx
xxx
Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications
established in the laws. (1264)
AGENCY
332
Art. 1868
No. An agent warrants that he is acting within the scope of
his authority, but being a mere mouthpiece of his principal, he
does not warrant the full contractual capacity of his principal.
(Patterson vs. Lippencott, 47 N.J.L. 457, cited in Teller, p. 228.)
ILLUSTRATIVE CASE:
Petitioner, who redeemed the share pro indiviso in a parcel of land
upon authority given by children of the owner, claims ownership over
said share.
Facts: A redeemed the share pro indiviso of B in a parcel of
land, upon the authority of a special power of attorney executed
in his favor by the children of B who is still alive. Relying upon
the power of attorney and redemption made by him, A now
claims to have acquired the share of B in the land.
Issue: Has A the right to have the portion he claims as his
share segregated and a certificate of title issued in his name
exclusively for said portion?
Held: No, for the following reasons:
(1) The special power of attorney authorized A to act for
or on behalf of the children of B, and hence, it could not have
possibly vested in him any property right in his own name;
(2) The children of B had no authority to execute said
power of attorney, because their father is still alive; and
(3) In consequence of said power of attorney (if valid) and
redemption, A could have acquired no more than the pro indiviso
share of B in the lot in question so that he cannot, without
the conformity of the other co-owners or a judicial decree of
partition, adjudicate to himself in fee simple a determinate
portion of said lot, as his share therein, to the exclusion of the
other co-owners. (Santos vs. Buenconsejo, 14 SCRA 407 [1965].)
(2) Agent. — Generally, anyone can be an agent. His capacity
is usually immaterial. In the case of the agent, since he assumes
no personal liability, he does not have to possess full capacity to
act for himself insofar as third persons are concerned. An agent
derives his authority from the principal, and a contract made by
the agent is legally viewed as a contract of the principal. Thus,
even one under legal disability (e.g., minor), whose contracts,
therefore, are not binding upon him may nevertheless act as an
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
333
agent and bind his principal although he cannot be a principal
appointing an agent.
(a) There is authority for the proposition that where
one knowingly and without dissent permits another to act
as his agent, the capacity of the latter will be conclusively
presumed. (3 Am. Jur. 2d 426.) However, some mental
capacity is necessary as an agent, and, therefore, persons who
are absolutely incapacitated, such as insane persons, cannot
be agents (2 C.J.S. 1041.) as they are completely incapable of
understanding the task to be performed. Obviously, principals
should appoint agents who are able to make sound decisions
in carrying out the agency.
(b) In an ordinary case, a person of sound mind not
otherwise incapacitated may act as agent for another since
his agreements bind only the principal. But in some instances,
additional qualifications must exist, the lack of which may
void the relationship which the alleged agent assumed.
An obvious illustration is that of an attorney to represent a
principal in legal matters. (Teller, op. cit., p. 47.)
(c) Insofar as his obligations to his principal are concerned, the agent must be competent to bind himself. The
extent to which an agent is a fiduciary and is subject to duties
and liabilities to his principal depends upon his capacity. (see
Restatement [Second] of Agency, Sec. 21, p. 93.)
(d) The relationship of trust and confidence which
constitutes one of the three fundamental characteristics of the
agency relationship results in the disqualification of agents to
act for the principal when it is their duty to act inconsistently
toward another. (Teller, op. cit., p. 46.)
Other names used to designate
the parties.
The names “principal” and “agent,” though the usual ones,
are not the only terms used to designate the parties to this relation.
The agent is frequently called an attorney, or an attorney-infact, and occasionally is spoken of as a proxy, delegate, or rep-
334
AGENCY
Art. 1868
resentative. The person represented, though usually called the
principal, is sometimes called the employer, constituent, or chief.
(Mechem, Sec. 26, cited in A. Padilla’s Civil Code VI, 1974 ed., p.
199.)
Acts that may be/not be delegated
to agents.
The general rule is that what a man may do in person, he may
do thru another. Thus, a stockholder may delegate to another his
right to inspect the books of the corporation because this is an
act which he can lawfully do personally. (Philpotts vs. Phil. Mfg.
Co., 40 Phil. 491 [1919].)
Some acts, however, cannot be done through an agent.
(1) Personal acts. — If personal performance is required by
law or public policy or the agreement of the parties, the doing
of the act by a person on behalf of another does not constitute
performance by the latter.
(a) The right to vote during election cannot be delegated
because voting is considered a purely personal act under the
law.
(b) The making of a will is a strictly personal act; it cannot
be accomplished through the instrumentality of an agent or
an attorney. (Art. 784; see, however, Art. 805.)
(c) Obviously, statements which are required to be made
under oath should be made personally.
(d) A member of the board of directors or trustees of a
corporation cannot validly act by proxy because his right to
attend the board meetings is personal to him. (Sec. 25, last
par., B.P. Blg. 68.)
(e) An agent cannot delegate to a sub-agent the performance of acts which he has been appointed to perform in
person. (see Arts. 1892-1893.) A re-delegation of the agency
would be detrimental to the principal as the second agent has
no privity of contract with the former. (Baltazar vs. Ombudsman, 510 SCRA 74 [2006].)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
335
(2) Criminal acts or acts not allowed by law. — An attempt to
delegate to another authority to do an act which, if done by the
principal would be illegal, is void. There can be no agency in the
perpetration of a crime or an unlawful act. (2 C.J.S. 1039-1040.)
(a) Since under our Constitution aliens are not allowed
to own private agricultural lands (Art. XII, Secs. 3, 7.), an
alien cannot purchase a land through a Filipino agent.
(b) Persons who, because of their position and relation
with the persons under their charge or property under their
control, are prohibited from acquiring said property, cannot
acquire the same through the mediation of another.5
(c) The law on agency governing civil cases has no
application in criminal cases. When a person participates in
the commission of a crime, he cannot escape punishment on
the ground that he simply acted as an agent of another party.
(Ong vs. Court of Appeals, 401 SCRA 684 [2003].)
Determination of existence
of agency.
In most circumstances, no formalities are required for the
creation of an agency relationship. The question of whether an
agency has been created is ordinarily a question which may be
5
Art. 1491. The following persons cannot acquire by purchase, even at a public or
judicial auction, either in person or through the mediation of another:
(1) The guardian, the property of the person or persons who may be under his
guardianship;
(2) Agents, the property whose administration or sale may have been intrusted to
them, unless the consent of the principal has been given;
(3) Executors and administrators, the property of the estate under administration;
(4) Public officers, and employees, the property of the State or of any subdivision
thereof, or of any government-owned or -controlled corporation or institution, the administration of which has been intrusted to them; this provision shall apply to judges and
government experts who, in any manner whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts,
and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose
jurisdiction or territory they exercise their respective functions; this prohibition includes
the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by
virtue of their profession;
(6) Any others specially disqualified by law. (1459a)
336
AGENCY
Art. 1868
established in the same way as any other fact, either by direct
or circumstantial evidence. The question is ultimately one of
intention.6
(1) Designation by the parties. — The manner in which the
parties designate the relationship is not controlling. If an act done
by one person in behalf of another is in its essential nature one
of agency, the former is the agent of the latter notwithstanding
he is not so called. Conversely, the use of the words “agency
agreement” and “agent” by the parties in a contract does not
necessarily have the effect of making one an agent who, in fact, is
not such. (Ibid., 43; see Albaladejo y Cia vs. Phil. Refining Co., 45
Phil. 556 [1923].)
(2) Fact of existence. — The question is to be determined by
the fact that one represents and is acting for another, and not by
the consideration that it will be inconvenient or unjust if he is not
held to be the agent of such other; and if relations exist which
will constitute an agency, it will be an agency whether the parties
understood the exact nature of the relation or not. (3 Am. Jur. 2d
430-431.)
(3) Presumption of existence. — The relation of agency cannot
be inferred from mere relationship or family ties unattended by
conditions, acts, or conduct clearly implying an agency. (2 C.J.,
Sec. 35.) For the relation to exist, there must be consent by both
parties, i.e., the principal consents that the other party, the agent,
shall act on his behalf and the agent consents so to act. The law
makes no presumption thereof. It must exist as a fact. (see People
vs. Yabut, 76 SCRA 624 [1977]; Lim vs. Court of Appeals, 251
SCRA 408 [1995].), proving its existence, nature and extent being
incumbent upon the person alleging it. (Tuazon vs. Heirs of B.
Ramos, 463 SCRA 408 [2005].)
(4) Intention to create relationship. — On the part of the
principal, therefore, there must be either an actual intention to
appoint, or an intention naturally inferable from his words or
actions, and on the part of the agent, there must be an intention to
accept the appointment and act on it, and in the absence of such
6
Citing De Leon & De Leon, Jr., Comments and Cases on Partnership, Agency, and
Trusts, 356-357 (1999).
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
337
intent, there is generally no agency. (2 C.J.S. 1041; see Dominion
Insurance Corp. vs. Court of Appeals, 376 SCRA 239 [2002]; Amon
Trading Corporation vs. Court of Appeals, 477 SCRA 582 [2005].)
The declarations of the agent alone are generally insufficient
to establish the fact or extent of his authority. (Litonjua vs.
Fernandez, 427 SCRA 478 [2004]; Tuazon vs. Heirs of B. Ramos,
supra; Litonjua, Jr. vs. Eternal Corporation, 490 SCRA 204 [2006].
However, if one professes to act as agent for another, he may
be estopped to deny his agency both as against the asserted
principal and the third persons interested in the transaction in
which he is engaged. (Doles vs. Angeles, 492 SCRA 607 [2006].)
(5) As between the principal and a third person. — As between
them, agency may exist without the direct assent of the agent.
Thus, by directing a third person to deal with another as agent,
the principal necessarily authorizes the agent to act for him. (2
C.J.S. 1043.) Neither is it necessary that the principal personally
encounter the third person with whom the agent entire acts. Precisely, the purpose of agency is to extend the personality of the
principal through the facility of the agent. (Doles vs. Angeles,
supra.).
Nature of relations between principal
and agent.
(1) Relations fiduciary in character. — The relations of an agent
to his principal are fiduciary in character since they are based on
trust and confidence (Severino vs. Severino, 44 Phil. 343 [1923].),
on a degree which varies considerably from situation to situation. The agreement to act on behalf of the principal causes the
agent to be a fiduciary, that is, a person having a duty, created by
his undertaking, to act primarily for the benefit of another, the
principal, in matters connected with his undertaking.7 (Restate7
The fiduciary nature of the relationship of agency is one which condemns as inaccurate fictions, uses of the term “agency” in situations where in fact no agency exists, as
in the following:
(1) Security devices. — A lienholder, such as a pledgee, mortgagee or other lien
or lienor is vested with a power to sell property covered by the lien, where the lienee
defaults in the payment of the debt which gave rise to the security. It is commonly stated
that the lienholder becomes “agent for the lienee” to foreclose the lien. This is inaccurate,
338
AGENCY
Art. 1868
ment of the Law on Agency, p. 45.)
In some cases, the fiduciary duties imposed on the agent
may continue even after the termination of the relationship. For
example, a former agent is under obligation to account to the
principal for all the profits arising out of the agency relationship.
(2) Agent estopped from asserting interest adverse to his principal.
— It is an elementary and very old rule that in regard to property
forming the subject matter of the agency, the agent is estopped
from asserting or acquiring a title adverse to that of the principal.
His position is analogous to that of a trustee and he cannot,
consistently with the principles of good faith, be allowed to
create in himself an interest in opposition to that of his principal
or cestui que trust.8
The rule stands on the moral obligation to refrain from placing one’s self in a position which ordinarily conflicts between
self-interest and integrity. It seeks to remove the temptation that
might arise out of such a relation to serve one’s self-interest at the
expense of one’s integrity and duty to another, by making it impossible to profit by yielding to temptation. (Thomas vs. Pineda,
89 Phil. 312 [1951]; Palma vs. Cristobal, 77 Phil. 712 [1946].)
However, an agent does not, by accepting the agency, lose
any prior claim which he himself may have to the property
with which he deals, nor is he estopped to assert that money
since the lienor in making such a sale acts for his own benefit, not for the benefit of the
lienee;
(2) Confession of judgment. — It is commonly stated that the party authorized to
enter judgment is the defendant’s agent but this is inaccurate. Confessions of judgment
are often if not always security for the plaintiff creditor. The creditor thus becomes the
possessor of a “power” to effect the defendant’s legal relations, but the absence of the
fiduciary relationship militates against the use of the term “agent” in this connection; and
(3) Assignment of non-negotiable choses in action. — “The assignment for value of an
intangible contract right may be most accurately looked upon as creating an irrevocable
legal power of attorney to enforce the assignor’s right with authority to keep the proceeds
when reduced to possession, coupled with an equitable ownership of the right prior to its
collection.” (citing Williston on Contracts [Rev. ed.], Sec. 404.) But it is apparent that the
assignee is not the agent of the assignor in the true sense of the word, for the assignee is
not acting for the assignor but not for himself. (Teller, op. cit., pp. 4-6.)
8
Art. 1435. If a person in representation of another sells or alienates a thing, the
former cannot subsequently set up his own title as against the buyer or grantee.
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
339
or property in his hands was not received by him as agent for
the principal, or that the principal parted with his interest in the
property subsequent to the delivery to him as agent, or that the
property has been taken from the principal by a paramount title,
or that he has been lawfully required to account for another, or
that the title is in another to whom he would be liable if he should
surrender the property to the principal. (3 C.J.S. 63.)
(3) Agent must not act as an adverse party. — In matters touching
the agency, agents cannot act so as to bind their principals, where
they have an adverse interest in themselves.
The rule is founded upon the plain and obvious consideration,
that the principal bargains, in the employment, for the exercise
of the disinterested skill, diligence and zeal of the agent, for his
own exclusive benefit. Even if impartiality could possibly be
presumed on the part of an agent, where his own interests were
concerned, that is not what the principal bargains for; and in
many cases, it is the very last thing which would advance his
interests. (Andrew vs. Ramsay & Co., [1903] 2 K.D. 635, cited in
Mechem, Selected Cases on the Law of Agency [3rd ed.], pp. 451452.)
(a) An agent cannot acquire by purchase, even at public or judicial auction, either in person or through the mediation of another, the property whose administration or sale
has been entrusted to him, unless the consent of the principal
has been given.9 (Art. 1491[2].) The agent’s incapacity to buy
his principal’s property rests in the fact that the agent and
the principal form one juridical person. The fear that greed
might get the better of the sentiments of loyalty and disinterestedness which should animate an administrator or agent,
is the reason underlying the incapacity. The ban connotes the
idea of trust and confidence. (G. Araneta, Inc. vs. del Paterno,
91 Phil. 786 [1952].)
Unless the principal consents, such sale is voidable, notwithstanding that the price was fair and that the agent could
9
(10) Acquiring Interest in Litigation. — The lawyer should not purchase any interest
in the subject matter of the litigation which he is conducting. (Canons of Professional
Ethics.)
340
AGENCY
Art. 1868
have done no better had he purchased the goods for the
principal in the open market. (Babb & Martin, Business Law
[1957], p. 143.)
An agent, however, can buy for himself the property
placed in his hands for sale or administration after the
termination of the agency (Valera vs. Velasco, 51 Phil. 695
[1928].), or if the principal gives his consent thereto (Cui vs.
Cui, 100 Phil. 913 [1957].), or other properties different from
those he has been commissioned to sell.
(b) Similarly, if the principal authorizes the agent to sell
goods, the agent must not sell to himself. His duty (to get
the highest price) here conflicts with his interest (to buy as
cheaply as possible). (Babb & Martin, op. cit., p. 143.) The
principal may recover damages for the wrongful sale. The
measure of the damages is the difference between the value
of the goods when sold and their value when the sale was
made known to, and repudiated by, the principal. (Teller, op.
cit., p. 137.)
But where it appears from the facts that the principal is
interested in the receipt of a fixed price for the subject matter
of the agency, he may sell to himself. Thus, where the agent
employed to sell a parcel of land at a certain minimum
price, any amount above the price being allowed to him as
commission, the agent may purchase the property himself.
Similarly, he may, under similar circumstances, act for both
buyer and seller. (Teller, op. cit., pp. 139-140, citing Halton vs.
Sherrard, 150 N.M. 135 and Empire vs. American Central Ins.
Co., 138 N.Y. 446.)
(4) Agent must not act for an adverse party. — An agent cannot
serve two masters, unless both consent, or unless he is a mere
middleman or intermediary (e.g., real estate broker) with no independent initiative. (Babb & Martin, op. cit., p. 143; see Allied
Free Worker’s Union [PLUM] vs. Compania Maritima, 19 SCRA
258 [1967].) An agent cannot act as such for both parties to the
same transaction, in the presence of conflicting interests, unless
he acts with the knowledge and consent of both, and on failure so
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
341
to operate, either party may repudiate the transaction involved.10
Compliance with this duty dictates that one cannot act as agent
for both buyer and seller in the same transaction since it is to the
interest of the vendor to secure the highest price and of the purchaser to pay the least, and the agent thereby assumes a conflicting interest. (3 C.J.S. 15-17.)
(a) Where a foreign company has an agent in the Philippines selling its goods and merchandise, it was held that the
same agent could not very well act as agent for local buyers,
because the interest of his foreign principal and those of the
buyers would be in direct conflict. He could not serve two
masters at the same time. (Far Eastern Export & Import Co.
vs. Lim Teck Suan, 97 Phil. 171 [1955].)
(b) Where an agent acts for both parties without the
knowledge or consent of either, he is chargeable as trustee
for all the profits of the transaction, and is responsible for
any loss sustained by the principal through such action, and
cannot recover compensation from either principal. The rule
has its foundation in reasons of public policy and it applies to
all dual agency relationships, notwithstanding that the agent
acts in good faith or that the principal objecting incurs no
harm therefrom. (3 C.J.S. 15-17.) Either principal can rescind.
(c) Where the third party (second principal) is aware
of the dual employment but the principal is not, the latter
10
(6) Adverse Influences and Conflicting Interest. — It is the duty of a lawyer at the time
of retainer to disclose to the client all the circumstances of his relations to the parties, and
any interest in or connection with the controversy, which might influence the client in the
selection of counsel.
It is unprofessional to represent conflicting interests, except by express consent of
all concerned given after a full disclosure of the facts. Within the meaning of this canon,
a lawyer represents conflicting interests when, in behalf of one client, it is his duty to
contend for that which duty to another client requires him to oppose.
The obligation to represent the client with undivided fidelity and not to divulge his
secrets or confidences forbids also the subsequent acceptance of retainers or employment
from others in matters adversely affecting any interest of the client with respect to which
confidence has been reposed. (Canons of Professional Ethics.)
When the same law firm handles the civil case of the present client and a prospective
client, the rule against representing conflicting interests applies. (Gonzales vs. Cabucana,
Jr., 479 SCRA 320 [2005].)
342
AGENCY
Art. 1868
has the right to affirm or rescind the transaction and recover
damages from the third party and the agent irrespective of
any proof of actual fraud or that an improper advantage has
been gained over him.
(d) If the double employment is with the knowledge
and consent of the principal, such principal is bound but
he cannot recover from the other. (see comments under Art.
1875.) A principal with knowledge of double agency cannot
complain of the agent’s breach of faith.
(e) The prohibition against dual agency does not apply
to cases where the principal possesses full knowledge of the
facts and consents thereto, or in which the interests of the
two principals are not conflicting and loyalty by the agent
to one of them does not comprise a breach of his duty to the
other, as may be where the agent exercises no discretion in
the matter but acts merely to bring the parties together, and
they themselves settle the terms of the agreement between
them. Also, the rule does not disqualify one who is the agent
of one party for a certain purpose from acting as agent of an
adverse party for an entirely different purpose. (Ibid., 17-18.)
For purposes of the income tax law, the withholding agent
is the agent of both the Government — in collecting and/or
withholding the tax due from the taxpayer — and the taxpayer
— in paying the tax withheld to the Government.
(5) Agent must not use or disclose secret information. — Requirements of good faith and loyalty demand of the agent the duty not
to use or divulge confidential information obtained in the course
of his agency for his own benefit to the principal’s injury and expense.11 After the agency is terminated, the agent is no longer un-
11
(37) Confidences of a Client. — It is the duty of a lawyer to preserve his client’s confidences. This duty outlasts the lawyer’s employment and extends as well as to his employees; and neither of them should accept employment which involves or may involve
the disclosure or use of these confidences, either for the private advantages of the client,
without his knowledge and consent, and even though there are other available sources
of such information. A lawyer should not continue employment when he discovers that
his obligation prevents the performance of his full duty to his former or to his new client.
(Ibid.)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
343
der a duty to abstain from competition and may then use general
information as to business methods and processes and names of
customers remembered (if not acquired in violation of his duty
as agent), but he must still not injuriously use or disclose unique
or confidential information entrusted to him only for the principal’s use or acquired by him in violation of his duty. (Babb &
Martin, op. cit., pp. 143-144; see comments under Art. 1919.)
(6) Agent must give notice of material facts. — Principles of
good faith and loyalty to the principal’s interests also require
that an agent make known to his principal every and all material
facts, of which the agent has cognizance, which concern the
transaction and subject matter of the agency. On failure to do so,
the agent may be held liable for damages for any loss suffered or
injury incurred as a result of such breach. (3 C.J.S. 8.)
The principal also owes the agent the duty to act with outmost
good faith. He may not keep from the agent information that has
any bearing on their agency relationship.
Knowledge of agent imputed
to principal.
(1) Agents’ duty of notification. — The importance of the duty
to give information of material facts becomes readily apparent
when it is borne in mind that knowledge of the agent is imputed
to the principal even though the agent never communicated such
knowledge to the principal. (see Art. 1821.) Thus, it is only logical
that the agent is required to notify the principal of all matters
that came to his attention that are material to the subject matter
of the agency. A typical illustration is where an agent, having
authority to buy property, learns that the property is encumbered
by an unrecorded mortgage. The knowledge of the agent will
be imputed to the principal so that the principal acquires the
property subject to the mortgage.
(2) Relationship of attorney and client. — The relationship
being one of confidence, there is ever-present the need for the
latter being adequately and fully informed of the mode and
manner in which his interest is defended. He is entitled to the
fullest disclosure of why certain steps are taken and why certain
344
AGENCY
Art. 1868
matters are either included or excluded from the documents he
is made to sign. (Oparel, Sr. vs. Abaria, Adm. Case No. 959, 40
SCRA 128 [1971].)
(3) Knowledge of the principal. — Note that the theory of imputed knowledge ascribes the knowledge of the agent to the
principal, not the other way around. The knowledge of the principal cannot be imputed to his agent. (Sunace International Management Services, Inc. vs. National Labor Relations Commission,
480 SCRA 146 [2006].)
Exceptions to the rule.
There are at least three exceptions to the rule imputing
knowledge of agent to the principal:
(1) Where the agent’s interests are adverse to those of the
principal;
(2) Where the agent’s duty is not to disclose the information,
as where he is informed by way of confidential information; and
(3) Where the person claiming the benefit of the rule colludes
with the agent to defraud the principal. (Teller, op. cit., p. 150.)
Agent subject to principal’s control.
(1) Subject matter of agency. — One factor which most clearly
distinguishes agency from other legal concepts is control; one
person — the agent — agrees to act under the control or direction
of another — the principal. Indeed, the very “agency’’ has come
to connote control by the principal. (Victorias Milling Co., Inc. vs.
Court of Appeals, 333 SCRA 663 [2000].)
The agent is subject to his principal’s control with respect
to the matters relevant to the agency relationship. Many legal
relationships are possessed of a fiduciary quality and the quality
of a power in one of the parties, yet the relationship falls short
of agency because of the absence of control on the part of one of
the parties. Thus, “the directors of a corporation are fiduciary
having power to affect its relations, but they are not agents of
the stockholders since they have no duty to respond to the will of
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
345
the stockholders as to the details of management.” (Ibid., citing
Restatement of Agency, Sec. 14a.)
(2) Act of agent. — The extent of the principal’s control over the
agent’s acts varies both with the type of the agency relationship
and the facts of the particular case. But the general rule is that
the principal may direct the acts of his agent even though the
principal has promised not to do so. The principal, of course,
becomes liable in damages for breach of his promise not to give
direction, but the agent cannot act in disregard of the principal’s
demands, i.e., the principal’s promise not to give directions is not
susceptible of specific performance. (Teller, op. cit., p. 8.)
Agency and similar contracts
or relations.
In order to classify a contract, due regard must be given to
its essential clauses. A contract is what the law defines it to be
and not what it is called by the contracting parties. (Quiroga
vs. Parsons Hardware Co., 38 Phil. 501 [1918].) The essence of
the contract determines what law should apply to the relation
between the contracting parties. (American Rubber Co. vs.
Collector of Internal Revenue, 64 SCRA 569 [1975].)
The important characteristic feature of an agency relationship
which distinguishes it from similar contracts or relations is the
agent’s power to bring about business relations between his
principal and third persons. This power is perhaps the most
distinctive mark of the agent, as contrasted with others who act
in representative capacities but are not agents.
Also, general agents (see Art. 1876.) are to be distinguished
from certain particular kinds of agents. Thus, while attorneys-atlaw, auctioneers, brokers, factors, partners, officers and agents of
corporations, and public officers may, in some respects at least, be
regarded as agents, they are distinguishable from general agents
because their authority is of a special and limited character in
most respects. (3 Am. Jur. 2d 420.)
Agency distinguished from loan.
Whether in a particular case the relation between the parties
346
AGENCY
Art. 1868
is one of lender and borrower12 or principal and agent depends
on the terms of the contract between them and their intention.
(1) Where money advanced to another is expressly regarded
as money lent, no agency results. One who borrows money to
conduct a business in which the lender has no interest or concern
in the manner of its conduct is not an agent of the lender, but
the financing of operations to be carried on by another for the
mutual advantage of both, without any obligation of such other
to return the money advanced, makes such other an agent rather
than a borrower. (2 C.J.S. 1030.)
(2) An agent may be given funds by the principal to advance
the latter’s business, while a borrower is given money for
purposes of his own and he must generally return it whether or
not his own business is successful. A lot, however, depends on
the intent of the parties. (see Ibid.)
(3) Where checks are deposited with a collecting bank, the
nature of the relationship created at that stage is one of agency,
that is, the bank is to collect from the drawees of the checks
the corresponding proceeds. After the checks are collected and
converted into cash, the creditor and debtor relationship is
created between the depositor and the bank. (see Jai-Alai Corp.
of the Phils. vs. Bank of the Phil. Islands, 66 SCRA 29 [1975].)
(4) Where one deposits money with a bank with instructions
to apply it in satisfaction of the debt of a third person, the
conventional “debtor and creditor relationship” between the
bank and the depositor is created, coupled with an “agency” on
the part of the bank to pay the debt, which is revocable at the will
of the depositor. (Brown vs. J.P. Morgan & Co., 31 N.V.S. 2d 323333.)
12
Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall
be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
347
Agency distinguished from lease
service.
The distinctions are the following:
(1) In agency, the basis is representation, while in lease of
service13 (see Art. 1689.), it is employment;
(2) In agency, the agent exercises discretionary powers, while
in lease of service, the lessor (like a servant) ordinarily performs
only ministerial functions (see Nielson & Co., Inc. vs. Lepanto
Consolidated Mining Co., 26 SCRA 540 [1968].);
(3) In agency, three persons are involved: the principal, the
agent, and the third person with whom the agent has contracted,
while in lease of service, only two persons are involved: the lessor
(master or employer) and the lessee (servant or employee); and
(4) Agency relates to commercial or business transactions,
while lease of service (like in the case of master and servant)
relates more to matters of mere manual or mechanical execution,
in which the servant acts under the direction and control of the
master. (Munn. vs. Wellsburg Banking & Trust Co., 66 S.E. 230,
231.)
The agent is employed in a capacity superior to that of the
servant, being entitled, in general, to use his discretion as to the
means to accomplish the end for which he is employed, while
the servant is directed by the master, not only as to what is to be
done, but how it shall be done; and the essential distinction is that
the agent is employed to establish contractual relations between
his principal and third persons, while the servant is not.14 (2 C.J.S.
13
Art. 1644. In the lease of work or service, one of the parties binds himself to execute
a piece of work or to render to the other some service for a price certain, but the relation
of principal and agent does not exist between them. (1544a)
14
Mechem on Agency (Sec. 37.) presents the same point. The Restatement of Agency
(Sec. 22a.), on the other hand, presents a different view. It is the extent of control exercised
by the principal, rather than the nature of the agent’s function, which determines the
relationship. The two views may be reconciled. An agent, to be sure, is always one whose
normal function is to bring his principal into dealings with third parties. But the fact that
a representative is, by the terms of the contract of representation, empowered to transact
business and to enter into contracts with third persons on the principal’s account does
not ipso facto create the relationship of principal and agent. Thus, a cashier in a bank is a
servant, although his very function is to bring his master into contractual relations with
third persons. The term “servant” is, therefore, seen to be a term whose precise nature is,
AGENCY
348
Art. 1868
1029.) Thus, one hired by a corporation to perform a specific task,
that of acting as a special guard and staying at the main entrance
of a moviehouse to stop gatecrashers and “to maintain peace
and order within the premises” is a mere employee and not an
agent as he is not employed to represent the corporation in its
dealings with third persons. (De la Cruz vs. Northern Theatrical
Enterprises, 95 Phil. 739 [1954].)
But a person may be employed to perform the duties of both
agent and servant. Thus, a bookkeeper who is also authorized to
purchase office supplies is in this respect acting as an agent. The
law of principal and agent is really an outgrowth and expansion
of the law of master and servant.15
ILLUSTRATIVE CASE:
Plaintiff agreed to operate mining claims of defendant subject to
the general control of the latter.
Facts: Under a management contract, N agreed to explore,
develop and operate the mining claims of L and to render for L
other services specified in the contract. N was to take complete
charge, subject at all times to the general control of the Board
of Directors of L, of the exploration and development of the
mining claims, hiring of staff and laborers, operation of the
mill, and marketing of minerals.
N was also to act as purchasing agent of supplies but no
purchase shall be made without the prior approval of L and
no commission shall be claimed by N on such purchase. N was
also authorized to make contracts subject to prior approval of L
for the sale and marketing of minerals mined.
Issue: Under the management contract, is N an agent of L?
though impossible of exact definition, determined by the characteristics both of economic
subservience and function. (Teller, op. cit., p. 13.)
15
Where a security agency recruits, hires and assigns the work of its watchmen or
security guards, the agency is the employer of such watchmen or guards, and not the
clients or customers of such agency. The fact that a client company may give instructions
or directions to the security guards assigned to it does not, by itself, render the client responsible as an employer of the security guards and liable for their wrongful acts or omissions. Those instructions or directions are ordinarily no more than request commonly
envisaged in the contract for services entered into with the security agency. (Soleman, Jr.
vs. Tuazon, 209 SCRA 51 [1992].)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
349
Held: No. It appears from the above contract that the
principal undertaking of N was the operation and development
of the mine and operation of the mill. All the other undertakings
mentioned in the contract are necessary or incidental to this
principal undertaking. In the performance of this principal
undertaking, N was not in any way executing juridical acts for
L, destined to create, modify or extinguish business relations
between L and third persons.
In other words, in performing its principal undertaking, N
was not acting as an agent of L, in the sense that the term “agent”
is interpreted under the law of agency but as one who was
performing material acts for an employer for a compensation.
(Nielson & Co., Inc. vs. Lepanto Consolidated Mining Company, 26
SCRA 540 [1968].)
Agency distinguished from
independent contract.
Where one party to a contract undertakes to accomplish a
certain result (as the construction of a house) according to his
own method and without being subject to the other party’s
control except as to the result of the work, the contract is one for
a piece of work16 and not agency. (Fressel vs. Mariano Uy Chaco
Sons & Co., 34 Phil. 122 [1915].)
In agency, the agent is subject to the control and direction
of the principal whom he represents with respect to the
matters entrusted to him. In a contract for a piece of work, the
independent contractor, without being subject to the control of
the employer except only as to the result of the work,17 exercises
16
Art. 1713. By the contract for a piece of work the contractor binds himself to execute
a piece of work for the employer, in consideration of a certain price or compensation. The
contractor may either employ only his labor or skill, or also furnish the material. (1588a)
17
Not every form of control that a party reserves to himself over the conduct of the
other party in relation to the services being rendered may be accorded the effect of establishing an employer-employee relationship. Logically, the line should be drawn between
rules that merely serve as guidelines towards the achievement of the mutually desired
result without dictating the means or methods to be employed to attaining it, and those
that control or fix the methodology and bind or restrict the party hired to the use of such
means. (AFP Mutual Benefit Ass’n., Inc. vs. National Labor Relations Commission, 267
SCRA 47 [1997], citing Insular Life Assurance Co., Ltd. vs. National Labor Relations Commission, 179 SCRA 459 [1984].)
AGENCY
350
Art. 1868
his employment independently, and not in representation of the
employer. (see Shell Co. of the Phils., Ltd. vs. Firemen’s Ins. of
Newark, N.J., 100 Phil. 755 [1957].)
The distinctions are important because, as a general rule,
the employer is not liable for the torts or injury inflicted by the
independent contractor upon third persons or by the employees
of such contractor. The employer, of course, is not relieved from
liability if the injury is caused by his negligence or the result of
his interference in the work of the independent contractor (in
this case, the contractor is not independent). There are cases
which hold the employer liable where the work contracted
is intrinsically dangerous or a nuisance. (Newman vs. Sears,
Roebuck & Co., 43 N.W. 2d 415.)
In a case, several individuals who agreed to sell the products
of a softdrinks manufacturer under an Agreement to Peddle Soft
Drinks, providing their own capital and hiring their own employees (delivery helpers) under their direction and responsibility were held as independent contractors, and consequently, the
manufacturer was not liable to pay SSS premiums for such employees. (Social Security System vs. Court of Appeals and Manila
Cosmos Aerated Water Factory, Inc., 112 SCRA 47 [1982].) For the
acts of the agent or servant within the scope of his authority or
employment, the principal or employer is, in general, liable.
ILLUSTRATIVE CASES:
1. Licensee of a gasoline service station operates station and its
equipment under the control of the owner.
Facts: A fire broke out at a gasoline service station. It
started while gasoline was being hosed from a tank into the
underground storage. The fire spread to and burned several
neighboring houses owned by C, etc.
The gasoline station as well as the equipment therein
is owned by P (Caltex). It claims, however, that the business
conducted at the service station in question was owned and
operated by A.
Issue: Whether P should be held liable for the damages
caused to C, etc. This question depends on whether A was an
independent contractor or an agent of P.
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
Held: P should be held liable. Under the license agreement,
A, as operator, would pay P purely nominal sum of P1.00 for the
use of the premises and all equipment therein. A could sell only
P’s products. Maintenance of the station and its equipment was
subject to the approval, in other words, control of P. A could not
assign or transfer his rights as licensee without the consent of
P. Termination of the contract was a right granted only to P but
not to A.
These provisions of the contract show that A was virtually
an employee of P, not an independent contractor. (Africa vs.
Caltex [Phils.], Inc., 16 SCRA 448 [1966]; see Shell Co. of the
Phils., Ltd. vs. Firemen’s Ins., Inc. of Newark, U.S., 100 Phil.
757 [1957] under Art. 1910.)
________
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2. Lessee who was injured due to the fault of an independent
contractor hired by the lessor seeks to hold lessor liable.
Facts: P, owner of an apartment house, ordered folding beds
from S and had A install one of them in one of his furnished
apartments. T, a lessee, was seriously injured when the bed
collapsed due to the fact that A used ordinary wood screws
instead of the lag screws designated to hold the bed in place.
The court found A an independent contractor. T argues that
even if A is held to have been an independent contractor, the
nature of the work done was such as to render P, the employer,
liable.
Issue: Is T’s argument tenable?
Held: No. A distinction must be made between the cases
in which the owner is held liable for work which he engaged
an independent contractor to perform and that for which he is
not held liable. Where the work, even if carried out according
to the orders of the owner is inherently dangerous to people
(e.g., dynamiting, excavating, etc.) and it is manifest that injury
is likely to result unless due precautions are taken, a duty rests
upon him to see that such necessary precautions are taken.
However, if the work is such which when accomplished is
not in itself dangerous to people, the employer, in the absence
of unusual circumstances, is not liable for the acts of the
independent contractor.
In the case at bar, the folding bed itself when properly
installed is not inherently dangerous and does not constitute
351
AGENCY
352
Art. 1868
a nuisance per se. The use of the wood screws was not ordered
by P and not known to him. Clearly, the work delegated to A
comes within the second classification for which P cannot be
held responsible. (Newman vs. Sears, Roebuck & Co., 43 N.W. 2d
415.)
One may be an independent contractor and, at the same
time for certain purposes, be an agent of the employer. Thus,
an independent contractor becomes an agent by his employer
agreeing to be responsible for obligations incurred by him in
the completion of his undertaking, but payment of workmen
by an owner or employer does not necessarily transform an
independent contractor into an agent. (2 C.J.S. 1029.)
Agency distinguished from
partnership.
A contract of partnership18 is a contract of agency, and it
differs from a pure agency in that while an agent acts only for
his principal, a partner acts not only for his co-partners and the
partnership but also as principal of himself. In other words, each
partner is regarded as an agent of his co-partners when he is
acting and as principal of his co-partners when they are acting.
This has been said to be the most certain test of partnership
as distinguished from ordinary agency or employment. A
partnership is, in effect, a contract of mutual agency.
In both cases, the agent or partner can bind the principal or
his co-partner only by such contracts as are entered into within
the scope of his authority. (Arts. 1910, 1803, 1818.) In general,
both conceptions import the idea of a fiduciary relationship.
The agency which results from the relation of partnership is
of a peculiar kind, sui generis, and must be distinguished sharply
from the ordinary concept of agency in two important respects:
18
Art. 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of dividing
the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
(1665a)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
353
(1) Control by the principal. — An essential characteristic of
the agency relationship, i.e., control by the principal, which is
not applicable to the partnership concept. It is fundamental in
the law of agency that an agent must submit to the principal’s
right to control the agent’s conduct in regard to the subject of
the agency. Yet the partnership relation, while having many of
the characteristics of the agency relationship, differs from it in
that a partner’s power to bind his co-partner is not subject to the
co-partner’s right to control, unless there is an agreement to that
effect.
(2) Liability of the agent. — A partner acting as agent for the
partnership binds not only the firm members but himself as well,
while the ordinary agent assumes no personal liability where
he acts within the scope of his authority. This is but a logical
deduction from the proposition that a partner is both an agent
and a principal at the same time when engaged in carrying on
the partnership business. It is for this reason that Article 1822
of the Civil Code provides that, as to wrongful acts of partners
done in the ordinary course of business “the partnership is liable
therefor to the same extent as the partner so acting or omitting to
act.”
(3) Sharing of profits. — Now, what is the test to determine
whether, in a given case, the parties have entered into a
relationship of partner and partner, or principal and agent?
The answer depends upon the manner in which the profits are
shared: “If, when earned, the profits belong to all the parties as
common proprietors in agreed proportions, the relation is one
of partnership, but if the alleged owner or partner takes his
agreed share of profits, not as owner but as an agreed measure
of compensation for his services or the like, the relation is one of
agency.” Accordingly, Article 1769(4) of the Civil Code provides
that the receipt by a person of the share of the profits of a business
is not prima facie evidence that he is a partner in the business if
such profits were received “as wages of an employee.” (Teller, op.
cit., pp. 22-23, citing Dinkelspeel vs. Lewis, 50 Wyo. 380; Person
vs. Cartex, 7 N.C. 324; 2 Corp. Jur. 426.)
AGENCY
354
Art. 1868
ILLUSTRATIVE CASE:
Branch manager of a travel agency company, who is a bona fide
travel agent herself, had assumed solidary liability with the company
for the payment of monthly rentals to the lessor.
Facts: A contract of lease was entered into between LS and
the Tourist World Service, Inc. (TWS), whereby the latter leased
the premises belonging to the former for use as a branch office.
LS held herself solidarily liable with TWS for prompt payment
of the monthly rental. When the branch office was opened, the
same was run by LS who was designated as branch manager.
Any airline fare brought in through the efforts of LS entitled
her to receive 4% of the proceeds. LS was not in the company’s
payroll.
On mere suspicion that LS was connected with a rival firm,
the office of branch manager was abolished.
Issue: What was the nature of the arrangement of LS and
TWS?
Held: (1) Employer-employee relationship not intended. — It
was not a case of employer-employee relation in view of the
following:
(a) LS was not subject to the control by TWS either as
to the result of the enterprise or as to the means used in
connection therewith. A true employee cannot be made to
part with his own money in pursuance of his employer’s
business or otherwise assume any liability thereof. “As to
the means used” in soliciting airline fares, LS “obviously
relied on her own gifts and capabilities;” and
(b) She was not in the company’s payroll. Unlike an
employee who usually earns a fixed salary, she earned compensation in fluctuating amounts, depending on her booking success. The fact that she was designated as “branch
manager” did not make her an employee. Employment is
determined by the “right of control” test and certain economic parameters, like the inclusion of the employee in the
payroll.
(2) Partnership not intended. — The parties had not
embarked on a partnership. LS herself did not recognize the
existence of such a relation when in her letter, she expressly
“concedes your (TWS) right to stop the operation of your branch
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
355
office,” in effect, accepting its control over the manner in which
the business was run. A joint venture, including a partnership,
presupposes generally a parity of understanding between the
joint co-venturers or partners in which each party has an equal
proprietary interest in the capital or property contributed and
where each party exercises equal rights in the conduct of the
business. Furthermore, the partners did not hold themselves
out as partners and the building itself was embellished with the
electric sign “Tourist World Service, Inc.,” in lieu of a distinct
partnership name.
(3) Principal-agent relationship intended. — The parties
have contemplated a principal-agent relationship. LS solicited
airline fares but she did so for and on behalf of her principal,
TWS. As compensation, she received 4% of the proceeds in the
concept of commission. In her head letter, she presumed her
principal’s authority as owner of the business undertaking.
The agency was one coupled with an interest (see Arts. 1927,
1930.) having been created for the mutual interest of the agent
(LS was a bona fide travel agent herself) and the principal, and,
therefore, could not be revoked at will. Accordingly, LS was
entitled to damages. (Sevilla vs. Court of Appeals, 160 SCRA 171
[1988].)
Agency distinguished from
negotiorum gestio.
In both agency and negotiorum gestio19 or the management of
the business or affairs of an absentee, there is representation.
The distinction lies in the fact that in the first, the representation
is expressly conferred, while in the second, it is not only without
the authority of the owner of the business but is without his
19
Art. 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to continue
the same until the termination of the affair and its incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical relation does
not arise in either of these instances:
(1) When the property or business is not neglected or abandoned.
(2) If in fact the manager has been tacitly authorized by the owner.
In the first case, the provisions of Articles 1317, 1403, No. 1 and 1404 regarding unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book shall be applicable.
(1888a)
356
AGENCY
Art. 1868
knowledge. While the agent acts according to the express will of
the principal, the gestor acts according to the presumed will of
the owner by exercising “all the diligence of a good father of a
family.” (Art. 2145.) Agency is a contract, while negotiorum gestio
is a quasi-contract. Hence, their juridical relations are different.
Agency distinguished from brokerage.
A broker is one who is engaged for others on a commission; a
negotiator between other parties, never acting in his own name
but in the name of those who employed him. Brokerage refers to
the trade or occupation of the broker. (Reyes vs. Rural Bank of
San Miguel, 424 SCRA 135 [2004].)
(1) A commission agent (see Art. 1903.) is one engaged in
the purchase or sale for another of personal property which for
this purpose, is placed in his possession and at his disposal. He
maintains a relation not only with his principal and the purchaser
or vendor, but also with the property which is the subject matter
of the transaction.
On the other hand, a broker20 has no relation with the thing
he buys or sells. He is merely an intermediary or negotiator
between the purchaser and the vendor relative to the property
with the custody or possession of which he has no concern. His
only office is to bring together the parties to the transaction never
acting in his own name but in the name of those who employed
him. (Pacific Commercial Co. vs. Yatco, 63 Phil. 398 [1936]; Tan
vs. Gullas, 393 SCRA 334 [2002].) In effecting a transaction, he,
however, acts in a certain sense as the agent of both parties.
Brokers are generally classified in accordance with the type of
property which they are authorized to sell or the type of contracts
they are authorized to make, such as insurance brokers, real
estate brokers, stock brokers, etc. They may be of two kinds: (1)
20
The term “brokerage” may refer to the business of a broker or to the fee or commission for transacting business as a broker. (3rd Webster’s Int. Dict., p. 282.) For definition
of “indent” and “indentor,” see Schmid & Oberly, Inc. vs. RJL Martinez Fishing Corp.
(166 SCRA 493 [1988].) Since a brokerage relationship is essentially a contract for the
employment of an agent, the principles of contract law also govern the broker-principal
relationship. (Abacus Securities Corp. vs. Ampil, 483 SCRA 315 [2006].)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
357
those authorized simply to secure customers for their principals,
the resulting contract being made by the principal parties; and
(2) those authorized to effect contracts. (Teller, op. cit., p. 10.)
(2) An agent receives a commission upon the successful
conclusion of a transaction such as sale. On the other hand, a
broker earns his pay merely by bringing the buyer and the seller
together, even if no sale is eventually made. (Hahn vs. Court of
Appeals, 266 SCRA 537 [1997].)
“Agent” is a broader term than “broker,” for, while brokers
are agents, their powers are limited, and when they have no
charge or control of the property, but act only as go-betweens
in executing a sale, they cannot be said to be agents in the larger
sense entitled to receive payment for the goods delivered, unless
specifically authorized. (Lawrence Gas Co. vs. Hawkeye Oil Co.,
165 N.W. 445, 447.)
ILLUSTRATIVE CASE:
Owner of land refused to sell the land to plaintiff who had entered
into a contract for the sale of the property with the owner’s real estate
broker.
Facts: T brought action against P. It appears that P wrote a
letter to A & Co., a real estate agent, as follows: “x x x. I have
offered my farm through you at extremely low rates for a year,
hoping to make a sale. You may list it for twelve months next on
the following terms: 732-1/2 acres at $16.00 per acre, payable
as follows: 1/3 cash, balance in 1, 2, and 3 years; or I will take
$10,000.00 cash. I will allow you a liberal commission if you can
place the farm.”
A and Co. thereafter purported to enter into a contract for
the sale of the land to T. P refused to sell the land, and this
action was brought for specific performance of the contract.
Issue: Is T entitled to specific performance?
Held: No. A real estate broker or agent is defined to be one
who negotiates the sale of real property. His business generally
is only to find a purchaser who is willing to buy the land upon
the terms fixed by the owner. He has no authority to bind his
principal by signing a contract of sale. A sale of real estate
involves the adjustment of many matters besides fixing the
price.
358
AGENCY
Art. 1868
The delivery of the possession has to be settled; generally,
the title has to be examined; and the conveyance with its
covenants, to be agreed upon and executed by the owner —
all of which require conference and time for their completion.
They are for the determination of the owner, and do not pertain
to the duties, and are not within the authority, of a real estate
agent. For obvious reasons, therefore, the law wisely withholds
from him any implied authority to sign a contract of sale in
behalf of his principal.
A real estate agent is not a general agent, but a special
agent, acting under limited power. He who deals with him,
if the agent exceeds or deviates from his authority, deals with
him at his peril. He cannot in such case, hold the principal
bound, unless there has been an intelligent ratification of the
unauthorized act of the agent, free from mistake or fraud.
(Halsey vs. Monteiro, 24 S.E. 258 [Va. 1896].)
Agency distinguished from sale.
An agency to sell differs from sale21 in the following ways:
(1) In an agency to sell, the agent receives the goods as the
goods of the principal, while in a sale, the buyer receives the
goods as owner (see Kerr & Co., Ltd. vs. Lingad, 38 SCRA 524
[1971].);
(2) In an agency to sell, the agent delivers the proceeds of the
sale, while in a sale, the buyer pays the price;
(3) In an agency to sell, the agent can return the object in case
he is unable to sell the same to a third person, while in a sale, the
buyer, as general rule, cannot return the object sold; and
(4) In an agency to sell, the agent, in dealing with the thing
received, is bound to act according to the instructions of his
principal, while in a sale, the buyer can deal with the thing as he
pleases, being the owner.
21
Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (1445a)
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
359
The elementary notion of sale is the transfer of title to a
thing from one to another, while the essence of agency involves
the idea of an appointment of one to act for another. Agency
is a relationship which often results in a sale, but the sale is a
subsequent step in the transaction. (Teller, op. cit., p. 26; see
Commissioner of Internal Revenue vs. Manila Machinery &
Supply Co., 135 SCRA 8 [1985].) An authorization given to
another containing the phrase “for and in our behalf’’ does not
necessarily establish an agency, as ultimately what is decisive is
the intention of the parties. Thus, the use of the words “sold and
endorsed’’ may mean that the parties intended a contract of sale,
and not a contract of agency. (Victorias Milling Co., Inc. vs. Court
of Appeals, 333 SCRA 663 [2000].)
EXAMPLES:
(1) P enters into a contract with A for the delivery to P of
goods on a certain date and A commences to accumulate the
goods for P. In determining whether A is P’s agent or whether
A is the vendor of the goods, two factors are relevant.
First, what is the nature of A’s power in accumulating the
goods, i.e., does he pledge his own credit or that of P? It will
be recalled that an essential feature of agency is the agent’s
power to bind the principal personally. Similarly, the problem
is important as to who, whether P or A, undertakes the risk
of fluctuation in price. If A undertakes to deliver the goods at
a fixed price, the transaction is more akin to sale rather than
agency.
Second, what is the extent of control which P, by the term of
the contract, reserves over A? If P, not A, is to determine from
whom, and in what way the goods are to be purchased, the
transaction is more likely one of agency and not one of sale.
(Teller, op. cit., p. 27.)
(2) A signed a document that he received P615 kilos of leaf
tobacco to be sold at P1.30 per kilo, “the proceeds to be given
to P as soon as it was sold.” Here, there is no contract of sale,
but mere agency to sell, as the agreement negates transfer of
ownership of the goods to A who has the obligation to return
the tobacco if the same was not sold. (see Lim vs. People, 133
SCRA 333 [1984].)
AGENCY
360
Art. 1868
ILLUSTRATIVE CASES:
1. Importer ordered goods from abroad to be subsequently
delivered to another who paid importer the price in advance.
Facts: CN, in Manila, delivered to UT Corporation the
price of 300 boxes of sunkist oranges to be obtained from the
United States. UT Corporation ordered the said boxes from G
Company of San Francisco which shipped the goods from that
port to Manila “F.O.B. San Francisco.” Part of the boxes were
lost in transit.
CN sought to recover from UT Corporation the corresponding price paid to it in advance for the undelivered goods. UT
Corporation refused to pay alleging it merely acted as agent of
CN in purchasing the oranges.
Issue: Did UT Corporation merely agree to buy for and on
behalf of CN, or did it agree to sell the oranges to CN?
Held: The circumstances indicate a sale:
(1) No commission was paid;
(2) The written agreement (Exhibit 1) between CN and UT
Corporation says that “if balance is not paid within 48 hours of
notification, merchandise may be resold by UT Corporation and
the deposit forfeited. “Resold” implies the goods had been sold to
CN;
(3) After executing Exhibit 1 wherein the oranges were
quoted at $6.30 per box, UT Corporation placed an order for
purchase of the same with GC at $6.00 per box, which UT
Corporation could not properly do if it were acting as agent of
CN and not as independent purchaser from GC;
(4) UT Corporation charged CN an amount for sales tax,
thereby implying that the transaction was a sale; and
(5) UT Corporation had been pressing the claims for
losses against the insurance company and against the shipping
company for itself and instead of assigning said claims to CN,
showing that the purchase had not been made on behalf of CN.
(Chua Ngo vs. Universal Trading Co., Inc., 87 Phil. 331 [1950].)
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________
2. Goods are sold to customer at a price which includes seller’s
“commission” from the supplier.
Facts: A’s mode of transacting business was to first ascertain
the price of onions by requesting price quotations from P, with
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
whom he made prior arrangement for the inclusion of his 5%
“commission” in the price quotations. A would then solicit
orders from his customers, after which he directly ordered
from B.
Issue: Does the stipulated commission make the relationship
between A and P a fiduciary one?
Held: No. The “commissions” were not commissions in
the true sense of the word. H asked for them in order to make
sure that he would always get a profit even if he quotes to his
customers the same price quotation given by P. The agreement
for “commission” assured him of getting at least 5% profit on
all orders he placed with P. (G. Eidi & Co. vs. Cu Bong Liong,
C.A.-G.R. No. 14607-R, Nov. 29, 1956.)
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3. An exclusive agent ordered equipment from its principal on
behalf of another who agreed to pay the price and 10% commission in
addition to the price, the agent binding itself to be responsible to such
another for unforeseen events.
Facts: GPS, Inc., exclusive agent in the Philippines for SP
Company of Richmond, Indiana, U.S.A., and AA Company
agreed that GPS would, on behalf of AA, order sound
reproducing equipment from SP and that AA would pay GPS,
in addition to the price of the equipment, a 10% commission,
plus all expenses such as freight, insurance, etc. Upon receipt
by GPS of the reply of SP to its cable inquiring about the price,
GPS informed AA of the price of $1,700.00. Being agreeable to
this price, AA formally authorized the order. AA discovered
that the price quoted to them by GPS was not the net price but
the list price and that GPS obtained a discount from SP.
AA instituted action to obtain a reduction from GPS or a
reimbursement of what GPS obtained as a discount from SP on
the theory that the relation between AA and GPS was that of
principal and agent.
Issue: Is the contract one of purchase and sale or one of
agency?
Held: It is one of purchase and sale for the following
reasons:
(1) The contract between the parties is clear that AA
agreed to purchase from GPS the equipment at prices indicated
361
AGENCY
362
Art. 1868
($1,700.00, plus the 10% commission and plus all the expenses
and charges) which are fixed and determinate and GPS agreed
to sell said equipment to AA;
(2) Whatever unforeseen events might have taken place
unfavorable to AA, such as change in prices, loss of the goods
not covered by insurance, or failure of SP to properly fill the
orders, AA should legally hold GPS to the price of $1,700. This is
incompatible with the pretended relation of agency, because in
agency, the agent is exempted from all liability in the discharge
of his commission provided he acts in accordance with the
instructions received from his principal, and the principal must
indemnify the agent for all damages which the latter may incur
in carrying out the agency without fault or imprudence on his
part;
(3) While GPS was to receive a 10% commission, it did not
necessarily make GPS an agent of AA as this provision is only
an additional price which AA bound itself to pay, and which
stipulation was not incompatible with the contract of purchase
and sale; and
(4) To hold GPS an agent of AA in the purchase of the
equipment from SP is incompatible with the admitted fact that
GPS is the exclusive agent of SP in the Philippines. It is out of
the ordinary for one to be the agent of both the vendor and the
vendee. (G. Puyat & Sons, Inc. vs. Arco Amusements Co., 72 Phil.
402 [1941]; see also Far Eastern Export & Import Co. vs. Lim
Teck Suan, 97 Phil. 171 [1955].)
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________
________
4. Contract, the title of which states that it is one of “purchase
and sale,” provides for the sale of floor wax by manufacturer to
another who is, however, designated as sole distributor of the article
within a certain territory.
Facts: S (surety) contends that it should not be held liable
on its bond for the reason that the latter was filed on the
theory that the contract between P (manufacturer of floor wax)
and A (P’s sole distributor of said article in certain specified
provinces) was one of agency as a result of which it guaranteed
the faithful performance of A as agent, but that it turned out
that said contract was one of purchase and sale, as shown by
the very title of said contract, namely, “contract of purchase
and sale.”
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
However, the contract shows that while it provides for sale
of the floor wax from P to A, it also designates A as the sole
distributor of the article within a certain territory; besides, the
contract provides that A is to furnish surety bond to cover all
shipments made by P to him.
Issue: Is the contract between P and A one of agency so that
breach thereof would come within the terms of the surety bond
posted by S?
Held: The contract is partly agency and partly purchase
and sale. While the contract is not entirely clear, S must have
understood the same to be one, at least partly, of agency
because (a) it also designates A as a sole distributor and (b) the
bond itself says that A “has been appointed exclusive agent” for
P.
Whether the article was purchased by A or whether it was
consigned to him is immaterial. The contract provides that A
was to furnish surety bond to cover all shipments made by P to
A. It appeared to have been the sole concern and interest of P to
be sure that it was paid the value of all shipments of the article
to A, and S, by its bond, guaranteed its payment by A, either
as purchaser or agent. (Pearl Island Commercial Corp. vs. Lim Tan
Tong, 101 Phil. 789 [1957].)
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________
________
5. Plaintiff seeks recovery of commission in connection with
sale by defendant of his vessel, claiming that he was agent of the latter.
Facts: A maintains that it was P’s agent in the sale of certain
vessels to IG (Indonesian Government). On the other hand, P
claims that A undertook to buy the vessels from P with a view,
in turn, of selling them, at its (A’s) own risk and account, to
IG and that this proposed sale to the latter by A having failed
completely, P “alone” sold the vessels to IG without A’s
intervention.
A seeks recovery of the commission agreed upon as
compensation for its services in connection with the sale of the
vessel.
Issue: What is the nature of the relation between P and A
under the transactions which culminated in the sale by P of the
vessels in question to IG?
Held: A acted merely as a broker or intermediary
between P and IG. One reason — among others — is that A’s
363
AGENCY
364
Art. 1868
representations to IG were approved by P and such approval
was transmitted and made known to IG. As the sale appeared to
have been the product of A’s intervention, he is entitled to the
commission agreed upon. (J. Ysmael & Co., Inc. vs. William Lines,
Inc., 103 Phil. [unrep.] 1135 [1958].)
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________
6. Plaintiff, designated as “buyer” and likewise “as agent of the
seller,” the defendant, agreed, at its (plaintiff’s) expense to export rice
and corn of the “seller” and to import collateral goods for the “seller”
in exchange for the rice and corn and to buy said goods from the latter.
Facts: Pursuant to a contract, D Corporation agreed to
export a certain quantity of rice and corn of N (Naric) and import
collateral goods in exchange therefor, and to buy from N the
said collateral goods. The exportation and importation was on
a no-dollar remittance or barter basis, that is to say, D was not
to be paid by its foreign buyer in dollars but in commodities.
D expected to make a profit out of its purchase from N of the
said goods thereby covering up whatever expenses and losses
it might incur in the exportation of the corn and rice which
under the contract shall be for its account.
The contract designates N as the seller and D as the buyer,
thereafter sets forth the role of the “buyer” (D) “as agent of
the seller” (N) in the barter transaction. D had exported all the
rice and corn at its expense and imported almost half of the
commodities stipulated when barter transactions were stopped
by a new succeeding administration.
N brought action for recovery of a sum of money
representing the balance of the value of corn and rice exported
by D which, according to N, D bought from N.
Issue: Did D buy the rice and corn in question or act merely
as an agent of N in the exportation of the same?
Held: As an agent, in view of the following circumstances:
(1) Under its charter (Sec. 3, R.A. No. 633.), it is N alone
which could export and import on barter basis;
(2) The contract itself clearly provides that D was to export
the rice and corn, and to buy the collateral goods;
(3) There is nothing in the contract providing unconditionally that D was buying the rice and corn;
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
(4) N called bids for the purchase of the rice and corn but
because of their poor quality, a direct purchase thereof even
with the privilege of importing commodities did not attract
good offers. That was where D came in with its offer to act as
agent. In other words, the primary consideration of D was not
the purchase of the corn but the purchase of the commodities
to be imported from the proceeds of the corn;
(5) The mode of payment supports the theory of agency.
The availability of the letters of credit opened by D to N was
dependent upon the issuance of the export permit and the
payment therefor depended on the importation of the collateral
goods; and
(6) It appeared that the price fixed in the contract for the
corn was given tentatively for the purpose of fixing the price
in barter. The contract provided that the price of the imported
commodities shall be equal to the total peso price offered for
the corn in consideration of the high price offered by D. Then
it set the value of the imported commodities not to exceed the
sum of P2,880,000.00 or equivalent to the peso value of the corn
and rice.
It was not the fault of D that the importation of the
remaining collateral goods could not be effected due to the
suspension by the government of barter transactions. (see Art.
1266.) It was the duty of N to make the necessary representations
with the government to enable D to import the said goods.
Consequently, N has no cause of action until it has secured the
necessary import permit. (National Rice and Corn Corp. vs. Court
of Appeals, 91 SCRA 437 [1979].)
________
________
________
7. Petitioner was granted by a non-resident foreign corporation
the exclusive dealership of the latter’s car in the Philippines.
Facts: AH (petitioner,) a Filipino citizen and BMW (private
respondent), a non-resident foreign corporation, executed on
March 7, 1967 a Deed of Assignment with Special Power of Attorney whereby the former was granted the exclusive dealership of the latter’s cars.
On February 24, 1993, AH received confirmation of
the information from BMW which, in a letter, expressed
dissatisfaction with various aspects of petitioner’s business,
mentioning among other things, decline in sales, deteriorating
services, and inadequate showroom and warehouse facilities,
365
366
AGENCY
Art. 1868
and petitioner’s alleged failure to comply with the standards
for an exclusive BMW dealer. Nonetheless, BMW expressed
willingness to continue business relations with the petitioner
on the basis of a “standard BMW importer” contract; otherwise,
it said, if this was not acceptable to petitioner, BMW would
have no alternative but to terminate petitioner’s exclusive
dealership effective June 30, 1993.
Because of AH’s insistence on the former business relation,
BMW withdrew on March 26, 1993 its offer of a “standard importer contract” and terminated the exclusive dealer relationship effective June 30, 1993.
Issue: The question is whether petitioner AH is the agent or
distributor in the Philippines of private respondent BMW.
Held: (1) Arrangement shows an agency. — “An agent
receives a commission upon the successful conclusion of a sale.
On the other hand, a broker earns his pay merely by bringing
the buyer and the seller together, even if no sale is eventually
made.’’
(2) BMW exercised control over AH’s activities. — “As to the
service centers and showrooms which he said he had put up at
his own expense, Hahn [AH] said that he had to follow BMW
specifications as exclusive dealer of BMW in the Philippines.
According to Hahn, BMW periodically inspected the service
centers to see to it that BMW standards were maintained.
Indeed, it would seem from BMW’s letter to Hahn that it was
for Hahn’s alleged failure to maintain BMW standards that
BMW was terminating Hahn’s dealership.
The fact that Hahn invested his own money to put up these
service centers and showrooms does not necessarily prove that
he is not an agent of BMW. For as already noted, there are facts
in the record which suggest that BMW exercised control over
Hahn’s premises to enforce compliance with BMW standards
and specifications. For example, in its letter to Hahn dated
February 23, 1996, BMW stated:
In the last years, we have pointed out to you in several
discussions and letters that we have to tackle the Philippine
market more professionally and that we are, through your
present activities, not adequately prepared to cope with
the forthcoming challenges.
In effect, BMW was holding Hahn accountable to it under
the 1967 Agreement.’’
Art. 1868
NATURE, FORM, AND KINDS OF AGENCY
367
(3) BMW engaged in business in the Philippines with AH as its
exclusive distributor. — “This case fits into the mould of Communications Materials & Design, Inc. vs. Court of Appeals (260 SCRA
673 [1996].), in which the foreign corporation entered into a
‘Representative Agreement’ and a ‘Licensing Agreement’ with
a domestic corporation, by virtue of which the latter was appointed ‘exclusive representative’ in the Philippines for a stipulated commission. Pursuant to these contracts, the domestic
corporation sold products exported by the foreign corporation
and put up a service center for the products sold locally. This
Court held that these acts constituted doing business in the
Philippines. The arrangement showed that the foreign corporation’s purpose was to penetrate the Philippine market and
establish its presence in the Philippines.
In addition, BMW held out private respondent Hahn as its
exclusive distributor in the Philippines, even as it announced
in the Asian region that Hahn was the ‘official BMW agent’
in the Philippines.’’ (Hahn vs. Court of Appeals, 266 SCRA 537
[1997].)
Agency distinguished from bailment.
While a bailment22 is frequently incident to the relation of
principal and agent, as for example, where property is entrusted
to another with authority to sell, ordinarily in cases of bailment,
the relation of principal and agent does not exist as the bailor has
no control over the bailee beyond what is given him by contract,
and is not responsible to others for his acts. A bailee over whose
actions the bailor has no control is not an agent, even though he
acts for the benefit of the bailor, and a bailee acting on behalf of
himself and whose interests are antagonistic to those of his bailor
cannot be the agent of the bailor. (2 C.J.S. 1027.)
There are two other essential characteristics of agency that
are not present in bailment, to wit: the bailee is possessed of no
22
The delivery of property of one person to another in trust for a specific purpose
with a contract, express or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special purpose is accomplished or
kept until the bailor reclaims it. (3 R.C.L. 73.) It contemplates the transfer of possession to
a recipient, called the bailee, who is not subservient to the will of the bailor, except, in the
usual case, in so far as the bailee is obliged to pay for the use of the object entrusted to his
possession. (Teller, op. cit., p. 24.)
AGENCY
368
Art. 1868
power to bind the bailor in personal liability and he owes neither
loyalty nor obedience to the bailor. A bailee, however, may be
constituted an agent as to third parties, where, for example, he
is vested with ostensible authority to sell or to make binding
contracts with respect to the subject matter of the bailment. (see
Teller, op. cit., p. 24.)
Agency distinguished from guardianship.
The distinctions are:
(1) While the agent derives his authority from his principal,
the guardian,23 although he acts for and on behalf of his ward,
does not derive his authority so to act from the ward (2 C.J.S.
1027.);
(2) The relation of principal and agent is founded upon
consent of the parties thereto, while that of guardian and ward
may be created irrespective of the consent or capacity of the
ward;
(3) Agents are subject to the control of their principals, while
guardians are not subject to the direction of their wards;
(4) A legal guardian is substituted by law, while ordinarily
an agent is the appointee of the principal and his power may at
any time be abrogated or modified by the principal (see 3 Am.
Jur. 2d 421.); and
(5) While an agent represents one who has capacity to contract for himself where he present, a guardian represents one
who has no such capacity.
Agency distinguished from trust.
The essential distinctions between a trust24 and an agency are
found ordinarily in the fact that in a trust, the title and control
23
The term “guardianship” refers to the relationship existing between guardian and
ward. A guardian is one who has or is entitled or legally appointed to the care and management of the person or estate of a minor or incompetent. (see Rules 93-95, Rules of
Court.)
24
Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the
trustee; and the person for whose benefit the trust has been created is referred to as the
beneficiary.
Art. 1869
NATURE, FORM, AND KINDS OF AGENCY
369
of the property under the trust instrument passes to the trustee
who acts in his own name, while the agent represents and acts
for his principal and in the further fact that while a trust may
ordinarily be terminated only by the fulfillment of its purpose,
an agency may in general be revoked at any time. (2 C.J.S. 1034.)
Agency is formed with the thought of constant supervision
and control by principal, whereas a trust is based on the idea
of discretion in the trustee and guidance by the settler or cestui
only to a limited extent and when expressly provided for.
(Stephens vs. Detroit Trust Co., 278 N.W. 799.) But while trust
is not an agency, it is possible for a trustee to be an agent also
where extensive direction and control are kept over the trustee.
(First Wisconsin Trust Co. vs. Wisconsin Dept. of Taxation, 294
N.W. 868, 870.) Incidentally, a director of a corporation acts in
a “fiduciary capacity” but the relationship is not of trust but
agency. (Bainbridge vs. Stoner, 106 P. 2d 423-426; see 2-A Words
and Phrases 456-457.)
Agency distinguished from judicial
administration.
The provisions of law on agency should not apply to a judicial
administration.
A judicial administrator is appointed by the court. He is not
only the representative of the said court, but also of the heirs and
creditors of the estate. A judicial administrator, before entering
into his duties, is required to file a bond. These circumstances
are not true in case of agency. The agent is only answerable to
his principal. The protection which the law gives the principal,
in limiting the powers and rights of an agent, stems from the fact
that control by the principal can only be through agreements;
whereas, the acts of a judicial administrator are subject to specific
provisions of law and orders of the appointing court. (San Diego,
Sr. vs. Nombre, 11 SCRA 165 [1964].)
ART. 1869. Agency may be express, or implied from
the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing
AGENCY
370
Art. 1869
that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a specific form. (1710a)
Kinds of agency.
Agency may be classified as follows:
(1) As to manner of its creation:
(a) express. — one where the agent has been actually
authorized by the principal, either orally or in writing (Art.
1869.); or
(b) implied. — one which is implied from the acts of the
principal, from his silence or lack of action, or his failure to
repudiate the agency knowing that another person is acting
on his behalf without authority (Ibid.), or from the acts of
the agent which carry out the agency, or from his silence
or inaction according to the circumstances. (Art. 1870.) An
implied agency is an actual agency as much as an express
agency.
The enumeration of cases of implied agency in Articles
1869 and 1870 is not exclusive.
Ratification may produce the effect of an express or implied
agency.25 It results in agency by ratification. (see Arts. 1901, 1910,
par. 2.) The principal cannot deny the existence of the agency
after third parties, relying on his conduct, have had dealings
25
Art. 2144. Whoever voluntarily takes charge of the agency or management of the
business or property of another, without any power from the latter, is obliged to continue
the same until the termination of the affair and its incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical relation does
not arise in either of these instances:
(1) When the property or business is not neglected or abandoned,
(2) If in fact the manager has been tacitly authorized by the owner.
In the first case, the provisions of Articles 1317, 1403, No. 1, and 1404 regarding unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book shall be applicable.
(1888a)
Art. 2149. The ratification of the management by the owner of the business produces
the effects of an express agency, even if the business may not have been successful. (1892a)
Art. 1869
NATURE, FORM, AND KINDS OF AGENCY
371
with the supposed agent. This method of creating an agency is
known as agency by estoppel or implication. (see Art. 1911.)
An agency may exist by operation of law. (see Arts. 1884, par.
2; 1885, 1929, 1931, and 1932.)
(2) As to its character:
(a) gratuitous. — one where the agent receives no
compensation for his services (Art. 1875.); or
(b) compensated or onerous. — one where the agent receives
compensation for his services. (Ibid.)
(3) As to extent of business covered:
(a) general. — one which comprises all the business of the
principal (Art. 1876.); or
(b) special. — one which comprises one or more specific
transactions. (Ibid.)
(4) As to authority conferred:
(a) couched in general terms. — one which is created
in general terms and is deemed to comprise only acts of
administration (Art. 1877.); or
(b) couched in specific terms. — one authorizing only the
performance of a specific act or acts. (see Art. 1878.)
(5) As to its nature and effects:
(a) ostensible or representative. — one where the agent acts
in the name and representation of the principal (Art. 1868.);
or
(b) simple or commission. — one where the agent acts in
his own name but for the account of the principal.
Form of agency.
The usual method an agency is created is by contract which
may be oral, written, or implied. There are some provisions of
law which require certain formalities for particular contracts. The
first is when the form is required for the validity of the contract;
the second, when it is required to make the contract effective
against third persons such as those mentioned in Articles 1357
AGENCY
372
Art. 1869
and 1358 of the Civil Code; and the third, when it is required for
the purpose of proving the existence of a contract such as those
provided in the Statute of Frauds in Article 1403. (Lim vs. Court
of Appeals, 254 SCRA 170 [1996].)
(1) In general, there are no formal requirements governing
the appointment of an agent. The agent’s authority may be oral
or written. It may be in public or private writing. An instance
when the law requires a specific form for the agency is Article
1874.
(2) Agency may even be implied from words and conduct
of the parties and the circumstances of the particular case. (Arts.
1869-1872.) But agency cannot be inferred from mere relationship
or family ties. (Sidle vs. Kaufman, 345 Pa. 549.) Thus, it has been
held that a father who was unable to drive an automobile but
who purchased one for pleasure and convenience of family was
not liable for injuries inflicted by the automobile while driven
by an adult son with the father’s permission on trip to make
arrangements for son’s approaching marriage, as no “agency” of
son for father was created. (Hildock vs. Grosso, 566 Pa. 222.)
EXAMPLES:
(1) Acts of principal. — A sold the goods belonging to P
without the consent of the latter. With knowledge of the facts, P
received the proceeds of the sale and even gave A a commission.
The acts of P constitute ratification (Art. 1317, par. 2.),
thereby giving the contract the same effect as if he had originally
authorized it.
(2) Principal’s silence or lack of action, or failure to repudiate
agency. — P’s property was being administered by A. Later, B
took charge of the administration of said property through the
designation by A who had to absent himself from the place for
reasons of health. P did not oppose the designation of B nor did
P appoint a new agent although the designation was expressly
communicated to him. He remained silent for nearly nine years
allowing B to take charge of the property.
It must be concluded that B acted by virtue of an implied
agency equivalent to a legitimate agency, tacitly conferred by P.
(See De la Peña vs. Hidalgo, 16 Phil. 450 [1950].)
Art. 1869
NATURE, FORM, AND KINDS OF AGENCY
373
As indicated in Article 1869, the principal must know “that
another person is acting on his behalf without authority’’ for an
agency to be implied.
ILLUSTRATIVE CASE:
Vendees a retro did not repudiate the deed of repurchase signed by
their son-in-law.
Facts: On April 7, 1938, S sold a parcel of land to P with
right of repurchase within ten (10) years from the date of sale.
On November 28, 1945, A, son-in-law of P, signed a document
wherein it is stated that P has allowed the representative
of S in the name of EA to repurchase the land, that P has
received together with A the redemption price; and that S has
repurchased the land. P, however, was not a signatory to the
deed and there is nothing in said document showing that A
was specifically authorized to act for and in behalf of P, the
vendee a retro.
According to P, A signed the document merely to show
that he had no objection to the repurchase and that A did not
receive the redemption price inasmuch as he had no authority
from P. On the other hand, S claimed that A signed the deed in
representation of his father-in-law (P) who was then seriously
sick and that A received the repurchase price. It appears that
from the execution of the repurchase document, S has been in
possession of the property, land taxes have been paid by him,
and P never repudiated the deed that A had signed.
Issue: Has S validly exercised his right of repurchase?
Held: Yes. “If, as alleged, S exerted no effort to procure the
signature of P after he had recovered from his illness, neither
did P repudiate the deed that A had signed. Thus, an implied
agency must be held to have been created from his silence or
lack of action, or his failure to repudiate the agency.” (Conde vs.
Court of Appeals, 119 SCRA 245 [1982].)
Appointment of agent.
It is not essential that an agent should be appointed directly
by the principal, but the appointment may be made through
374
AGENCY
Art. 1869
another,26 as by referring an applicant to another and representing
that he has authority to act, or the relation may arise out of an
agreement to employ the agent of another, such person then
becoming the agent of the first party.
An agent appointed by the directors of a corporation to act
for the corporation is an agent of the corporation and not of the
directors. (2 C.J.S. 1044-1045.)
Presumption of agency.
(1) General rule. — Agency is generally not presumed. The
relation between principal and agent must exist as a fact. Thus,
it is held that where the relation of agency is dependent upon
the acts of the parties, the law makes no presumption of agency,
and it is always a fact to be proved, with the burden of proof
resting upon the person alleging the agency to show, not only
the fact of its existence, but also its nature and extent. (Antonio
26
Sec. 6. Duty of court to inform accused of his right to counsel. — Before arraignment,
the court shall inform the accused of his right to counsel and shall ask him if he desires
to have one. Unless the accused is allowed to defend himself in person or has employed
counsel of his choice, the court must assign a counsel de oficio to defend him. (Rule 116,
Rules of Court.)
Sec. 13. Appointment of counsel de oficio for accused on appeal. — It shall be the duty of
the clerk of court of the trial court, upon the filing of a notice of appeal to ascertain from
the appellant, if confined in prison, whether he desires the Regional Trial Court, Court
of Appeals or the Supreme Court to appoint a counsel de oficio and to transmit with the
record, upon a form to be prepared by the clerk of court of the appellate court, a certificate
of compliance with this duty and of the response of the appellant to his inquiry. (Rule 122,
Rules of Court.)
Sec. 2. Appointment of counsel de oficio for the accused. — If it appears from the record
of the case as transmitted: (a) that the accused is confined in prison, (b) without counsel
de parte on appeal, or (c) has signed the notice of appeal himself, the Clerk of Court of the
Court of Appeals shall designate a member of the bar to defend him, such designation to
be made by rotation, unless otherwise directed by order of the court.
An accused-appellant not confined in prison shall not be entitled to a counsel de
oficio, unless the appointment of such counsel is requested in the appellate court within
ten (10) days from receipt of the notice to file brief and the right thereto is established by
affidavit. (Rule 124, Rules of Court.)
Art. 381. When a person disappears from his domicile, his whereabouts being
unknown, and without leaving an agent to administer his property, the judge, at the
instances of an interested party, a relative, or a friend, may appoint a person to represent
him in all that may be necessary.
This same rule shall be observed when under similar circumstances the power conferred by the absentee has expired. (181a)
Art. 1869
NATURE, FORM, AND KINDS OF AGENCY
375
vs. Enriquez, [C.A.] 51 O.G. 3536; Lopez vs. Tan Tioco, 8 Phil. 693
[1907]; Harry E. Keller Elec. Co. vs. Rodriguez, 44 Phil. 19 [1922].)
It is a rule that whatever statements or communications made
by the parties (supposed principal and agent) between them, if
anything thereto appears contrary to their intention, the latter
will always prevail. (3 C.J.S. 252.)
(2) Exceptions. — A presumption of agency may arise, however, in those few cases where an agency may arise by operation
of law27 (3 Am. Jur. 706.) or to prevent unjust enrichment. Thus, it
has been held that a shipper may be held liable for freightage on
bills of ladings signed by another person where the shipper appears as shipper or consignee, on bills of lading where other persons appear as shippers, and on unsigned bills of lading, where
the evidence shows that the goods shipped actually belong to
such shipper. (Compania Maritima vs. Limson, 141 SCRA 407
[1986].)
Authority of attorney to appear
on behalf of his client.
(1) Authority in an action presumed. — The pertinent provisions
of Rule 138 of the Rules of Court state:
“SEC. 21. Authority of attorney to appear. — An attorney is
presumed to be properly authorized to represent any cause
in which he appears, and no written power of attorney is
required to authorize him to appear in court for his client,
but the presiding judge may, on motion of either party
and on reasonable grounds therefor being shown, require
any attorney who assumes the right to appear in a case to
produce or prove the authority under which he appears, and
to disclose, whenever pertinent to any issue, the name of the
27
Art. 1803. When the manner of management has not been agreed upon, the following rules shall be observed:
(1) All the partners shall be considered agents and whatever any one of them may
do alone shall bind the partnership, without prejudice to the provisions of Article 1801.
(2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to
the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought. (1695a)
376
AGENCY
Art. 1869
person who employed him, and may thereupon make such
order as justice requires. An attorney wilfully appearing in
court for a person without being employed, unless by leave
of the court, may be punished for contempt as an officer of
the court who has misbehaved in his official transactions.
SEC. 22. Attorney who appears in lower court presumed to
represent client on appeal. — An attorney who appears de parte
in a case before a lower court shall be presumed to continue
representing his client on appeal, unless he files a formal
petition withdrawing his appearance in the appellate court.
SEC. 23. Authority of attorneys to bind clients. — Attorneys
have authority to bind their clients in any case by any
agreement in relation thereto made in writing, and in taking
appeals, and in all matters of ordinary judicial procedure.
But they cannot, without special authority, compromise their
client’s litigation, or receive anything in discharge of a client’s
claim but the full amount in cash.”
(2) Scope of authority. — An act performed by counsel within
the scope of a “general or implied authority’’ is regarded as an act
of the client. Consequently, the mistake or negligence of counsel
may result in the rendition of an unfavorable judgment against
the client. While the application of this general rule certainly
depends upon the surrounding circumstances of a given case,
there are recognized exceptions:
(a) Where reckless or gross negligence of counsel
deprives the client of due process of law;
(b) When its application will result in outright deprivation of the client’s liberty or property; or
(c) Where the interests of justice so require. (Air Phil.
Corp. vs. International Business Aviation Services Phils., Inc.,
438 SCRA 51 [2004].)
(3) Authority outside of court. — The relation of attorney and
client is, in many respects, one of agency and the ordinary rules
of agency apply to such relation. The extent of authority of a
lawyer, when acting on behalf of his client outside of court is
measured by the same test as that which is applied to an ordinary
agent. Thus, in a case, the respondent lawyer who actively
Art. 1870
NATURE, FORM, AND KINDS OF AGENCY
377
participated in representing complainant and his co-heirs in a
pending homestead patent application, could himself acquire
the certificates of title and other documents without need of a
special power of attorney from them. (Uytengsu II vs. Baduel,
477 SCRA 621 [2005].) But a lawyer (counsel) acts beyond the
scope of his authority in questioning the compromise agreement
entered into by his client for a client has the right to compromise
a suit without the intervention of his lawyer the only qualification
being that if such compromise is entered into with the intent of
defrauding the lawyer of the fees justly due him, in which case
the compromise must be subject to such fees. (J. Phil. Maine, Inc.
vs. National Labor Relations Commission, 561 SCRA 675 [2008].)
ILLUSTRATIVE CASE:
Client confirmed in an affidavit authority of counsel to file
petition in question, even as the filing was made before the date of
execution of power of attorney.
Facts: On November 5, 1962, the law firm of A filed with the
Philippine Patent Office a petition on behalf of P which petition
was dismissed by the Director of Patents on the ground that on
the date it was filed, A was not yet authorized by P to file the
said pleading as the power of attorney was executed by P only
on November 12, 1962. The petition was filed pursuant to a
cablegram from P’s patent agents in the United States.
In its motion for reconsideration, A attached an affidavit
of P which states that the cablegram from its American agents
was duly authorized. The motion was denied.
Issue: Was A authorized to represent P when A filed the
petition on November 5, 1962?
Held: The relationship between counsel and client is strictly
a personal one. It is a relationship the creation of which courts
and administrative tribunals cannot but recognize on the faith
of the client’s word, especially when no substantial prejudice is
thereby caused to any party. (Pittsburgh Plate Glass Co. vs. The
Director of Patents, 56 SCRA 243 [1974].)
ART. 1870. Acceptance by the agent may also be
express, or implied from his acts which carry out the
agency, or from his silence or inaction according to the
circumstances. (n)
378
AGENCY
Art. 1871
Form of acceptance by agent.
Since agency is a contract, there must be consent by both
parties. An agency is either express or implied, and this is true on
the part of the principal (Art. 1869.) as well on that of the agent.
(Art. 1870.) It does not depend upon express appointment and
acceptance.
“Articles 1870 to 1873 are new provisions concerning the
constitution of an agency.’’ (Report of the Code Commission,
p. 149.)
ART. 1871. Between persons who are present, the acceptance of the agency may also be implied if the principal delivers his power of attorney to the agent and the
latter receives it without any objection. (n)
Acceptance between persons present.
As regards implied acceptance by the agent, the law
distinguishes between cases (1) where persons are present (Art.
1871.) and (2) where persons are absent. (Art. 1872.) The agency
is impliedly accepted if the agent receives a power of attorney
from the principal himself personally without any objection,
both being present.
The presumption of acceptance may be rebutted by contrary
proof.
Definition and purpose of a power
of attorney.
(1) A power of attorney is an instrument in writing by which
one person, as principal, appoints another as his agent and confers
upon him the authority to perform certain specified acts or kinds
of acts on behalf of the principal. The written authorization itself
is the power of attorney, and this is clearly indicated by the fact
that it has also been called a “letter of attorney.”
(2) Its primary purpose is not to define the authority of the
agent as between himself and his principal but to evidence the
authority of the agent to third parties within whom the agent
deals; and the person holding a power of attorney is shown and
Art. 1871
NATURE, FORM, AND KINDS OF AGENCY
379
designated as an “attorney-in-fact,” thus distinguishing such
person from an attorney-at-law (3 Am. Jur. 2d 433.), a lawyer.
Except as may be required by statute, a power of attorney is
valid although no notary public intervened in its execution.28 (see
Reyes vs. Santiago, C.A.-G.R. Nos. 47996-7-R, Nov. 27, 1975; see
Angeles vs. Phil. National Railways, 500 SCRA 744 [2006].)
Construction of powers of attorney.
(1) Rule of strict construction. — It is the general rule that
a power of attorney must be strictly construed and strictly
pursued. Under this rule, the instrument will be held to grant
only those powers which are specified and defined, and the agent
may neither go beyond nor deviate from the power of attorney.
In other words, the act done must be legally identical with that
authorized to be done. Moreover, where the mode of exercising
a power is prescribed in the instrument in which it is created,
there must be a strict compliance therewith in every substantial
particular.29 This is but in accord with the disinclination of courts
to enlarge the authority granted.
(2) Qualification of the rule. — The rule is not absolute and
should not be applied to the extent of destroying the very
purpose of the power. If the language will permit, a construction
should be adopted which will carry out, instead of defeat, the
purpose of the appointment. Even if there are repugnant clauses
in a power of attorney, they should be reconciled, if possible, so
28
A special power of attorney executed in a foreign country is generally not admissible in evidence as a public document in our courts. (Teotoco vs. Metropolitan Bank &
Trust Co., 575 SRA 82 [2008]; see Sec. 25, Rule 132, Rules of Court.)
29
Sec. 9. Evidence of written agreements. — When the terms of an agreement have been
reduced to writing, it is considered as containing all the terms agreed upon and there can
be, between the parties and their successors-in-interest, no evidence of such terms other
than the contents of the written agreement.
However, a party may present evidence to modify, explain or add to the terms of the
written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement
of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement.
The term “agreement’’ includes wills. (Rule 130, Rules of Court.)
AGENCY
380
Art. 1871
as to give effect to the instrument in keeping with its general
intent or predominant purpose. Furthermore, the instrument
should always be deemed to give such powers as are essential
or usual and reasonably necessary and proper in effectuating the
express powers. (3 Am. Jur. 2d., 437-438; Angeles vs. Philippine
National Railways, 520 SCRA 444 [2006]; Mercado vs. Allied
Banking Corporation, 528 SCRA 444 [2007].)
EXAMPLES:
(1) P gave A a written power of attorney to sell a parcel of
land. The contract describes the property, provides in a general
way the terms of the sale, and specifies A’s commission. Is A
also authorized to sign a contract of sale in behalf of P?
No. The power of a real estate broker or agent ordinarily
extends only to finding a purchaser. Unless clearly authorized
by his contract of employment to so sign a contract of sale so
as to bind his employer, a broker or agent cannot so bind him.
(See Brown vs. Hogan, 138 Md. 257, 113 A. 756 [1919].)30
(2) P authorized A to sell the former’s horse and to receive
the stipulated price. Is A also authorized to bind P by a warranty
of title and soundness?
Yes. A, being empowered to sell, is entrusted with all
powers proper for effectuating the sale, and a warranty of title
and quality is both proper and a usual power for that purpose.
The warranty may fairly be presumed within the scope of A’s
authority. (See Alexander vs. Gibson, 2 Camp. 555 [1811], cited
in Cooley vs. Perrine, 41 N.J. 322 [1879], which held a contrary
view.)
ILLUSTRATIVE CASES:
1. Agent, who was authorized in writing to sell pianos of
principal, sold a piano borrowed from the latter, to a person who acted
in good faith.
Facts: A piano was hired by P to A who later, sold the piano.
The contract of bailment was in writing. A was at the same
time, constituted by P as his agent to sell pianos and organs;
30
Unless otherwise indicated, subsequent illustrative American and English cases
have been adopted from Mechem, Selected Cases on the Law of Agency (3rd ed.).
Art. 1871
NATURE, FORM, AND KINDS OF AGENCY
and the authority was also in writing. It was provided that A
was “to make all orders for the same to P” and that “the pianos
are to be sent direct from the factory.”
T purchased the piano in question from A without any
notice of the limited agency or her want of authority to sell.
Issue: Did the sale confer title to the piano on T?
Held: No. The sale by A was an unauthorized conversion.
The contract of letting for hire expressly took it out of the
operation of the other agreement authorizing sales of pianos.
Furthermore, it was clearly contemplated by the contract of
agency that A was “to make all orders” to P for such pianos as
might be sold, and that they were to be shipped “direct from
the factory” by P.
Powers of attorney are ordinarily subjected to a strict
construction as to preclude all authority not expressly given, or
necessarily to be inferred. (Cummins vs. Beaumont, 68 Ala. 204
[1880].)
________
________
________
2. A retail dealer of pianos, acting as agent of manufacturer,
sold a piano to a person from whom the piano is sought to be recovered
by the manufacturer for not having received payment from the retail
dealer.
Facts: P, a manufacturer of pianos and organs, delivered the
piano in question to A under a contract in writing signed by A
in which he agreed “to sell the same [said piano] for account
of P in cash” and they agreed that said piano should remain
the property of P until paid for. P never received any payment
from A for said piano which was sold to T.
Issue: Is P entitled to recover the piano from T?
Held: No. T had no knowledge of the existence of the contract between P and A. A was the consignee of the piano for the
express purpose of selling it. He was a regular retail dealer in
musical instruments. Having been entrusted with the possession of the piano as a retail dealer in goods of that kind with
power and authority to sell, the sale by A to T, an innocent purchaser for value, should prevail against the reserved title of P.
In the Cummins case, supra, the agent was not a retail dealer
in musical instruments, but a mere agent to solicit orders for
such instruments to be filled directly by the principal. (Bent vs.
Jerkins, 112 Ala. 485, 20 SO 655 [1895].)
381
382
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Arts. 1872-1873
ART. 1872. Between persons who are absent, the acceptance of the agency cannot be implied from the silence of the agent, except:
(1) When the principal transmits his power of attorney to the agent, who receives it without any objection;
(2) When the principal entrusts to him by letter or
telegram a power of attorney with respect to the business in which he is habitually engaged as an agent, and
he did not reply to the letter or telegram. (n)
Acceptance between persons absent.
If both the principal and the agent are absent, acceptance of
the agency by the agent is not implied from his silence or inaction.
Since the agent is not bound to accept the agency, he can simply
ignore the offer.
However, in the two cases mentioned in Article 1872, agency
is implied. Thus, there is implied acceptance if the agent writes a
letter acknowledging receipt of the power of attorney but offers
no objection to the creation of the agency. (No. 1.) But his mere
failure to give a reply does not mean that the agency has been
accepted unless the “power of attorney is with respect to the
business in which he is habitually engaged as an agent” (No.
2.),31 or the acceptance could be inferred from his acts which carry
out the agency (Art. 1870.) as when he begins to act under the
authority conferred upon him.
It should be noted that under Article 1872, the principal
transmits the power of attorney to the agent. In Article 1871, he
personally delivers the power of attorney to the agent.
ART. 1873. If a person specially informs another or
states by public advertisement that he has given a power of attorney to a third person, the latter thereby becomes a duly authorized agent, in the former case with
respect to the person who received the special information, and in the latter case with regard to any person.
31
Under the Rules of Court, it is disputably presumed “that a letter duly directed and
mailed was received in the regular course of the mail.’’ (Sec. 3[v], Rule 131.)
Art. 1873
NATURE, FORM, AND KINDS OF AGENCY
383
The power shall continue to be in full force until the
notice is rescinded in the same manner in which it was
given. (n)
Communication of existence
of agency.
There are two ways of giving notice of agency with different
effects:
(1) If by special information (e.g., by letter), the person
appointed as agent is considered such with respect to the person
to whom it was given.
(2) If by public advertisement, the agent is considered as
such with regard to any person. Public advertisement may be
made in any form — through the newspaper, radio, etc. and by
posters or billboards.
In either case, the agency is deemed to exist whether there is
actually an agency or not.
Manner of revocation of agency.
The power of attorney must be revoked in the same manner
in which it was given. (par. 2.)
If the agency has been entrusted for the purpose of contracting
with specified persons, its revocation shall not prejudice the latter
if they were not given notice thereof. (Art. 1921.) If the agent had
general powers, revocation of the agency does not prejudice third
persons who acted in good faith and without knowledge of the
revocation. Notice of the revocation in a newspaper of general
circulation is a sufficient warning to third persons. (Art. 1922.)
Nevertheless, revocation made in any manner is effective where
the person dealing with the agent has actual knowledge thereof;
otherwise, bad faith and fraud would be committed.
EXAMPLE:
P especially informs X that he has given A a power
of attorney. With respect to X, A thereby becomes a duly
authorized agent of P. To rescind the power of attorney, P must
give notice in the same manner in which he was given, namely,
by special information to X.
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384
Art. 1873
Public advertisement is not sufficient unless X has actual
knowledge of the revocation. But if P makes known the
appointment of A by public advertisement, termination of the
agency by special information to X or by public advertisement
is effective against him.
ILLUSTRATIVE CASES:
1. Principal terminated his relations with his agent without
giving notice to one who was especially informed of agent’s authority
to act on his behalf.
Facts: P sent a letter to B informing that he has opened in
his steamship office “a shipping and commission department
for buying and selling leaf tobacco and other native products”
and that he had conferred upon A a public power of attorney
“to perform in my name and on my behalf all acts necessary
for carrying out my plans” with a request to “make due note of
his (A’s) signature hereto affixed.” Accepting the invitation, B
proceeded to do a considerable business with P through A, as
his factor.
A converted to his own use part of the proceeds from the
sale of tobacco leaf which were sent by B to A. Prior to the
sending of said tobacco, P had severed his relations with A,
which fact was not known to B and no notice of any kind was
given to B of the termination of the relations between P and A.
Issue: Is P liable for A’s conversion?
Held: Yes. Having advertised the fact that A was his agent
and given B a special invitation to deal with A, it was the duty of
P on the termination of the relationship of principal and agent
to give due and timely notice thereof to B. Failing to do so, P is
responsible to B for whatever the latter may have in good faith
and without negligence sent to A without knowledge, actual or
constructive, of the termination of such relationship. (Rallos vs.
Yangco, 20 Phil. 269 [1911].)
________
________
________
2. A note was indorsed on behalf of a bank in favor of a person
who did not know of the indorser’s resignation as president of the
bank.
Facts: A resigned as president of P (bank). Subsequently, A
indorsed in favor of T a note on behalf of P. T, who had dealt
Art. 1873
NATURE, FORM, AND KINDS OF AGENCY
385
with P while A was President, did not know of A’s resignation.
P denied A’s authority to endorse.
The only evidence adduced to prove notice of the
termination of such authority as A had was oral testimony to
the publication of a notice of the resignation in a newspaper.
Issue: In the absence of proof that the notice was seen and
read by T, who denied he ever saw it, is the notice sufficient?
Held: No. On the termination of an agency, persons who
have dealt with the principal through the agent may continue
to do so, in the absence of knowledge of the fact, and the
principal will be bound by the acts of the former agent as fully
as if his authority had not ceased.
The duty of the principal to notify third persons of the
termination of the agency is of the same character and requires
the same degree of certainty as that which the law imposes upon
the members of a co-partnership in the case of a dissolution as
a measure of protection from liability by reason of subsequent
acts of the former members of the dissolved firm.32 (Union Bank
& Trust Co. vs. Long Pole Lumber Co., 70 W. Va. 558, 74 S.G. 674
[1912].)
Estoppel to deny agency.
(1) Estoppel of agent. — One professing to act as agent for
another may be estopped to deny his agency both as against
his asserted principal and the third persons interested in the
transaction in which he engaged.
(2) Estoppel of principal:
(a) As to agent. — one who knows that another is acting as
his agent and fails to repudiate his acts, or accepts the benefits
of them, will be estopped to deny the agency as against such
other.
(b) As to sub-agent. — to estop the principal from denying
his liability to a third person, he must have known or be
charged with knowledge of the fact of the transaction and
the terms of the agreement between the agent and sub-agent.
32
See Art. 1834, Chap. 3, Part 1.
386
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Art. 1873
(c) As to third persons. — one who knows that another
is acting as his agent or permitted another to appear as his
agent, to the injury of third persons who have dealt with the
apparent agent as such in good faith and in the exercise of
reasonable prudence, is estopped to deny the agency.
(3) Estoppel of third persons. — A third person, having dealt
with one as an agent may be estopped to deny the agency as
against the principal, agent, or third persons in interest. He will
not, however, be estopped where he has withdrawn from the
contract made with the unauthorized agent before receiving any
benefits thereunder. (see 2 C.J.S. 1062-1067.)
(4) Estoppel of the government. — The government is neither
estopped by the mistake or error on the part of its agents. (Pineda
vs. CFI of Tayabas, 52 Phil. 803 [1959].) But it may be estopped
through affirmative acts of its officers acting within the scope of
their authority. (Bachrach vs. Unson, 50 Phil. 981 [1957].)
Agency by estoppel and implied agency
distinguished.
Agency by estoppel (see Art. 1911.) should be distinguished
from implied agency. (see Arts. 1881-1882.)
(1) Existence of actual agency. — In the latter, there is an actual
agency, as much as if it were created by express words. The
principal alone is liable. In an agency by estoppel, there is no
agency at all, but the one assuming to act as agent has apparent
or ostensible, although not real, authority to represent another. It
is not a real agency as is one under express or implied authority.
(a) If the estoppel is caused by the principal, he is liable
to any third person who relied on the misrepresentation. Our
Supreme Court has said: “One who clothes another with
apparent authority as his agent, and holds him out to the
public as such, cannot be permitted to deny the authority of
such person to act as his agent to the prejudice of innocent
third parties dealing with such person in good faith and in
the honest belief that he is what he appears to be.” (Macke vs.
Camps, 7 Phil. 553 [1907]; Naguiat vs. Court of Appeals, 412
SCRA 591 [2003].)
Art. 1873
NATURE, FORM, AND KINDS OF AGENCY
387
(b) If the estoppel is caused by the agent, then only the
agent is liable.
(2) Reliance by third persons. — Agency by estoppel can be
invoked only by a third person who in good faith relied on the
conduct of the principal in holding agent out as being authorized,
while such reliance is not necessary in an implied agency since
in such case, the agent is a real agent. As to third persons, the
principal is equally liable in the case of agency by estoppel and
implied agency.
(3) Nature of authority. — As between the principal and the
agent, the distinction between the two kinds of agency is vital.
(a) An agent by implied appointment is a real agent with
all the rights and liabilities; he has actual authority to act on
behalf of the principal. An apparent agent, an agent by estoppel, is no agent at all, and as against the principal, has none of
the rights of an agent (2 C.J.S. 1050-1051.), except where the
principal’s conduct or representations are such that the agent
reasonably believed that the principal intended him to act as
agent in the matter.
(b) Implied agency, being an actual agency, is a fact to be
proved by deductions or inferences from other facts, while in
a strict sense, agency by estoppel should be restricted to cases
in which the authority is not real but apparent. (2-A Words
and Phrases 461.)
Agency by estoppel is well recognized in the law. If the estoppel is on the ground of negligence or fraud on the part of
the principal, the agency is allowed upon the theory that, when
one of two innocent persons must suffer loss, the loss should
fall upon him whose conduct brought about the situation. (Ibid.,
459.)
EXAMPLES:
(1) Agency may be implied, when considered with all
the attending circumstances from the fact that: legal title has
been placed in the name of another; one is placed in charge
of another’s business to conduct it for him; one is placed in
possession of personal property belonging to another; one is
388
AGENCY
Art. 1874
given money to invest or pay over to another; one is given a
note for collection or to receive payment thereon; an account
against a third party is placed in the hands of a person for
collection; etc.
But mere possession of a note is not enough to show an
agency as where the note is left by the signer for his convenience.
One is not made the agent of the purchaser simply by having
been placed in possession of goods sold until such time as the
agent of the purchaser should arrive. (Ibid., 1046-1047.)
(2) P tells T that A is authorized to sell certain merchandise.
P privately instructs A not to consummate the sale but
merely to find out the highest price T is willing to pay for the
merchandise. If A makes a sale to T, the sale is binding on P
who is in estoppel to deny A’s authority.
In this case, there is no agency created but there is a power
created in A to create contractual relations between P and T,
without having authority to do so. The legal result, however, is
the same as if A had authority to sell.
(3) P authorized A to sell the former’s car. A sold the car to
T who paid A the purchase price. However, A did not give the
money to P.
T is not liable to P. A has implied authority to receive
payment.
ART. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the
latter shall be in writing; otherwise, the sale shall be
void. (n)
Sale of land through agent.
As a general rule, the agent’s authority may be oral or
written. (Art. 1869.) An agency to sell on commission basis does
not belong to any of the categories of contracts for which the law
(see Arts. 1357, 1358, 1403.) requires certain formalities; hence, it
is valid and enforceable in whatever form it may be entered into.
(Lim vs. Court of Appeals, 254 SCRA 170 [1996].)
Under this article, the sale of a piece of land (not any other
real estate) or any interest thereon, like usufruct, mortgage, etc.,
through an agent is void unless the authority of the agent to sell
Art. 1874
NATURE, FORM, AND KINDS OF AGENCY
389
is in writing. (Cosmic Lumber Corp. vs. Court of Appeals, 265
SCRA 168 [1996].) It should, however, be considered as merely
voidable since the sale can be ratified by the principal (see Arts.
1901, 1910, par. 2.) such as by availing himself of the benefits
derived from the contract.
(1) Article 1874 speaks only of an agency for “sale of a piece
of land or any interest therein.” It may be argued, therefore, that
an agency to purchase need not be in writing. Such an agency,
however, is covered by Article 1878(5) which provides that, “A
special power of attorney is necessary to enter into any contract
by which the ownership of an immovable is transmitted or
acquired.”
(2) Article 1874 refers to sales made by an agent for a principal and not to sales made by the owner personally to another,
whether that other be acting personally or through a representative. (Rodriguez vs. Court of Appeals, 29 SCRA 419 [1969].)
(3) A real estate broker is not within Article 1874 where his
authority (as is usual) is limited to finding prospective purchasers
and does not extend to making a contract to pass title. (Babb &
Martin, op. cit., p. 135.)
(4) A letter containing the specific authority to sell is held
sufficient. (see Jimenez vs. Rabot, 38 Phil. 387 [1918].) But when
there is any reasonable doubt that the language used conveys
such power, no such construction shall be given the document.
(Liñan vs. Puno, 31 Phil. 259 [1915]; Cosmic Lumber Corp. vs.
Court of Appeals, supra.)
(5) The express mandate required by law to enable an
appointee of an agency couched in general terms to sell must
be one that expressly mentions a sale or that includes a sale as a
necessary ingredient of the act mentioned. (Strong vs. Gutierrez
Repide, 6 Phil. 680 [1906]; Cosmic Lumber Corp. vs. Court of
Appeals, supra.)
The written authorization need not contain a particular
description of the property which the agent is permitted to sell.
(a) Thus, the power giving to the agent the power to sell
“any or all tracts, lots, or parcels” of land belonging to the
principal is adequate. (Ibid.)
390
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Art. 1874
(b) Similarly, a power of attorney stating that “I hereby
confer sufficient power x x x upon A, in order that in my name
and representation he may administer the interest I possess
within this Municipality of Tarlac, purchase, sell, collect and
pay, etc.” was held sufficient to cover the sale by the agent of
land of the principal in Tarlac. (Liñan vs. Puno, 31 Phil. 259
[1915].)
(c) The authority to sell any kind of realty that “might
belong” to the principal was held to include also such as the
principal might afterwards have during the time it was in
force. (Katigbak vs. Tai Hing Co., 52 Phil. 622 [1928].)
(6) To authorize a conveyance of real estate, a power of
attorney must be plain in its terms.
(a) Where such power is specifically conferred, it does not
authorize a conveyance by the agent to himself; unless such
power is expressly granted, it will not be implied. (Mechem,
Selected Cases on the Law of Agency [3rd ed.], pp. 142-143;
see Art. 1491[2].)
(b) Where the power of attorney says that the agent can
enter into any contract concerning a land, or can sell the land
under any term or condition and covenant he may think
fit, the power granted is so broad that it practically covers
the celebration of any contract and the conclusion of any
covenant or stipulation, and it undoubtedly means that the
agent can act in the same manner and with same breadth and
latitude as the principal could concerning the property. (P.
Amigo and J. Amigo vs. S. Teves, 96 Phil. 252 [1954].)
(7) Where the co-owners of land affixed their signatures
on the contract to sell, they were no longer selling their shares
through an agent, but, rather, they were selling the same directly
and in their own right, therefore, a written authority is no longer
necessary in order to sell their shares in the subject land. (Oesmer
vs. Paraiso Development Corporation, 514 SCRA 228 [2007].)
Under Article 1403 (No. 2, par. [e].) of the Civil Code, an oral
agreement for the sale of real property or of an interest therein is
unenforceable even if there is no agent.
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
391
ART. 1875. Agency is presumed to be for a compensation, unless there is proof to the contrary. (n)
Agency presumed to be with
compensation.
This article changes the rule in the old Civil Code (Art.
1711.) under which an agency was presumed to be gratuitous.
Hence, the agent does not have to prove that the agency is for
compensation.
The prima facie presumption that the agency is for a compensation may be contradicted by contrary evidence.
ILLUSTRATIVE CASES:
1. Non-members of a labor union which obtained benefits for
all members and non-members, workers, refused to pay agency fee of
the union.
Facts: NB (labor union) is the bargaining representative of
all regular workers paid on the daily basis of SMB (San Miguel
Brewery, Inc.). Having obtained benefits for all workers of
SMB, it signed a collective bargaining agreement with SMB
which provided among others that SMB will deduct the NB
agency fee from the wages of workers who are not members of
NB provided the aforesaid workers authorized SMB to make
such deduction in writing or if no such authorization is given,
if directed by a competent court.
In view of the refusal of W (an independent worker’s
association in SMB) to pay the union agency fee and of SMB to
deduct the said agency fee from the wages of workers who are
not members of NB, NB brought action for the collection of the
same under the bargaining contract.
Issue: May the collection of the union agency fee be justified
on the principle of agency?
Held: (1) Benefits of collective bargaining agreement accrue
to all employees. — No. It is true that whatever benefits the
majority union obtains from the employer accrue to its
members as well as to its non-members. But the above does
not justify the collection of agency fee from non-members. For
the benefits of a collective bargaining agreement are extended
AGENCY
392
Art. 1875
to all employees regardless of their membership in the union
because to withhold the same from the non-members would be
to discriminate against them. The benefits that accrue to nonmembers by reason of the agreement can hardly be termed
as “unjust enrichment” (see Art. 2142.) because the same are
extended to them precisely to avoid discrimination.
(2) Responsibility of bargaining agent to represent all employees.
— When a union acts as the bargaining agent, it assumes the
responsibility imposed upon it by law to represent not only
its members but all employees in the appropriate bargaining
unit of which it is an agent. Article 1875 states that agency
is presumed to be for compensation unless there is proof
to the contrary. There can be no better proof that the agency
created by law between the bargaining representative and the
employees in the unit is without compensation than the fact
that these employees in the minority voted against the NB
union. (National Brewery & Allied Industries Labor Union of the
Phils. vs. San Miguel Brewery, Inc., 8 SCRA 805 [1963].)
________
________
________
2. Agent seeks compensation for services rendered to a
committee created by creditor banks to reorganize an insolvent
company indebted to the banks to one of which he is counsel.
Facts: Several creditor banks of an insolvent company
appointed a committee to formulate and execute a plan for the
reorganization of the insolvent company. A, counsel to P, one of
the creditor banks, was a member of the committee. An action
is brought by A against defendant creditor banks to recover
compensation for his services rendered to the committee.
Issue: Is A entitled to receive compensation?
Held: No. The general rule is that where service is rendered
by one person for another at the latter’s request and under
circumstances which negate the idea that it is gratuitous, the
law implies a promise to pay reasonable compensation therefor.
But where the service is rendered with the understanding that
it is gratuitous, the law does not raise an implied promise to
pay therefor, no matter how valuable the service may be.
Here, A was acting not so much for the defendant creditor
banks but mainly for P for which he was counsel, and the
defendants had a right to suppose that his offer of service was
gratuitous as to them, A being prompted in doing so by reason
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
393
of his agency relation with P. (Robinson vs. Lincoln Trust, 95
N.J.L. 445, cited in Teller, pp. 151-152.)
Necessity of compensation.
The relation of principal and agent can be created although
the agent receives no compensation.
A person who agrees to act as an agent without compensation
is a gratuitous agent. Ordinarily, the promise of a gratuitous agent
to perform is not enforceable. He is, however, bound by his
acceptance to carry out the agency. (Art. 1884, par. 1.) The fact that
he is acting without compensation has no effect upon his rights
and duties with reference to the principal and to third parties.
However, the circumstance that the agency was for compensation
or not, shall be considered by the court in determining the extent
of liability of an agent for fraud or for negligence. (Art. 1909.)
The principal is liable for the damage to third persons caused
by the torts of the gratuitous agent whose services he accepted.
Liability of principal to pay
compensation.
(1) Amount. — The principal must pay the agent the compensation agreed upon, or the reasonable value of the agent’s
services if no compensation was specified.33
33
Sec. 24. Compensation of attorneys; agreement as to fees. — An attorney shall be entitled to have and recover from his client no more than a reasonable compensation for his
services, with a view to the importance of the subject matter of the controversy, the extent
of the services rendered, and the professional standing of the attorney. No court shall be
bound by the opinion of attorneys as expert witnesses as to the proper compensation, but
may disregard such testimony and base its conclusion on its own professional knowledge. A written contract for services shall control the amount to be paid therefor unless
found by the court to be unconscionable or unreasonable. (Rule 138, Rules of Court.)
Sec. 31. Attorneys for destitute litigants. — A court may assign an attorney to render
professional aid free of charge to any party in a case, if upon investigation it appears that
the party is destitute and unable to employ an attorney, and that the services of counsel
are necessary to secure the ends of justice and to protect the rights of the party. It shall be
the duty of the attorney so assigned to render the required service, unless he is excused
therefrom by the court for sufficient cause shown. (Rule 138, Rules of Court.)
Sec. 32. Compensation for attorneys de oficio. — Subject to availability of funds as may
be provided by law the court may, in its discretion, order an attorney employed as counsel de oficio to be compensated in such sum as the court may fix in accordance with Section
394
AGENCY
Art. 1875
(2) Compliance by agent with his obligations. — The liability of
the principal to pay commission presupposes that the agent has
complied with his obligation as such to the principal.
Accordingly, a broker is entitled to the usual commissions
whenever he brings to his principal a party who is able and
willing to take the property and enter into a valid contract upon
the terms then named by the principal, although the particulars
may be arranged and the matter negotiated and consummated
between the principal and the purchaser directly. It would be
the height of injustice to permit the principal then to withdraw
the authority as against an express provision of the contract,
and reap the benefits of the agent’s labors, without being liable
to him for his commission. This would be to make the contract
an unconscionable one, and would offer a premium for fraud
by enabling one of the parties to take advantage of his own
wrong and secure the labor of the other without remuneration.
(Macondray & Co. vs. Sellner, 33 Phil. 370 [1916]; Lim vs. Saban,
447 SCRA 232 [2004]; Perez de Tagle vs. Luzon Surety Co., [C.A.]
28 O.G. 1213.)
A broker is never entitled to commission for unsuccessful
efforts.
(a) Thus, a broker whose job is to effect a transaction
in behalf of the principal is not entitled to commission
even if he finds or first contacts the buyer, shows him the
property involved, interests him in it, negotiates with him
or even indirectly influences him to come to terms, if he did
not succeed in bringing about the sale subsequently made
on those terms by the principal to the same person through
another broker. (Quijano vs. Esguerra, [C.A.] 40 O.G. [Sup.
11] 166.)
(b) A broker or agent engaged in the sale of real estate
is not limited to bring vendor and vendee together and
arranging the terms and conditions of a sale of real estate. He
24 of this rule. Whenever such compensation is allowed, it shall not be less than thirty
pesos (P30) in any case, nor more than the following amounts: (1) Fifty pesos (P50) in
light felonies; (2) One hundred pesos (P100) in less grave felonies; (3) Two hundred pesos (P200) in grave felonies other than capital offenses; (4) Five hundred pesos (P500) in
capital offenses. (Ibid.)
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
395
must bring about the consummation of the contract of sale
as to be entitled to collect a commission. He is not entitled to
compensation for merely perfecting the contract, unless that
right is clearly stipulated in the agreement with the owner.
As sales of real estate must be in writing, the preparation
of the necessary documents for the transfer of the property
sold in the absence of any contrary agreement, is part of
the functions of the broker. If he abandons the transaction
before the execution of such documents, he is not entitled
to commission. (Quijano vs. Soriano, 10 C.A. Rep. 198; J.M.
Tuason & Co. vs. Collector of Internal Revenue, 108 Phil. 700
[1960].)
(c) An agent employed to secure a purchaser may sue
for commission upon showing that a purchaser whom he secured bought his principal’s property, even though the principal did not know that the agent had referred the purchaser; but he is not entitled to commission where the principal
made a sale at a reduced price to one whom he believed in
good faith to be unconnected with the broker. (Teller, p. 153,
citing 142 A.L.R. 270; Offutt & Oldham vs. Winters, 227 Ky.
56.) Common practice is for a buyer to inform the seller who
referred him. Likewise, agents working on commission basis
will not normally pass up a commission by not informing
their principal of a referred buyer. (People vs. Castillo, 333
SCRA 506 [2000].)
(3) Procurring cause of the transaction. — In many cases, complex negotiations are involved in which it is difficult to determine whether the agent has been the one responsible for the sale
or purchase or other transaction. The governing rule is that the
agent must prove that he was the guiding cause for the transaction or, as has been said, the “procuring cause” thereof, depending upon the facts of the particular case (Teller, op. cit., p. 153,
citing Note, 36 Harv. L. Rev. 875.); otherwise, he is not entitled to
the stipulated broker’s commission. (Inland Realty Investment
Service, Inc. vs. Court of Appeals, 273 SCRA 70 [1997].)
The term “procuring cause’’ in describing a broker’s activity,
refers to a cause originating a series of events which, without
AGENCY
396
Art. 1875
break in their continuity, result in the accomplishment of the
prime objective of the employment of the broker — producing a
purchaser ready, willing and able to buy on the owner’s terms.
The broker’s efforts must have been the foundation on which
the negotiations resulting in a sale began. In other words, the
broker must be instrumental in the consummation of the sale to
be entitled to a commission. (Philippine Health Care Providers,
Inc. vs. Estrada, 542 SCRA 616 [2008].)
ILLUSTRATIVE CASE:
Property was sold by another broker at a higher price after the
first broker found would-be purchaser.
Facts: P agreed to pay A a commission of 5% if A could sell
P’s factory for P1,200,000.00. No definite period of time was
fixed within which A should effect the sale. A found a person
who intended to purchase such a factory as B was selling, but
before such would-be purchaser definitely decided to buy the
factory in question at the fixed price of P1,200,000.00, P had
effected the sale for P1,300,000.00 through another broker.
Issue: Is A entitled to recover the P60,000.00 (5% of
P1,200,000.00) for services rendered, assuming that he could
have effected the sale if P had not sold the factory to someone
else?
Held: No. He is not entitled to recover anything. The broker
must be the efficient agent or procuring cause of the sale. The
means employed by him and his efforts must result in the sale.
The duty assumed by the broker is to bring the minds of the
buyer and seller to an agreement for a sale, and the price and
terms on which it is to be made, and until that is done his right
to commission does not accrue.
A broker is never entitled to commissions for unsuccessful
efforts. The risk of failure is only his. The reward comes only
with his success. (Dañon vs. Brimo & Co., 42 Phil. 133 [1921]; see
also Reyes vs. Mosqueda, 99 Phil. 241 [1956]; Coll. of Internal
Revenue vs. Tan Eng Hong, 18 SCRA 531 [1966].)
(4) Evasion of commission in bad faith. — The principal cannot
evade the payment of the commission agreed upon by inducing
the agent to sign a deed of cancellation of the written authority
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
397
given him after the agent had found a buyer who was able, ready,
and willing to close the deal under the terms prescribed by the
principal on the ground that she was no longer interested in the
deal which was a mere subterfuge, and later selling the property
to said buyer. Such act is unfair as would amount to bad faith,
and cannot be sanctioned without according to the agent the
compensation which is due him. The seller’s withdrawal in bad
faith of the broker’s authority cannot unjustly deprive the broker
of his commission as the seller’s duly constituted agent. (Infante
vs. Cunanan, 93 Phil. 693 [1953]; Lim vs. Saban, 447 SCRA 232
[2004].)
(5) Compensation contingent on profits. — Where the
compensation is contingent or dependent upon the realization of
profit, the agent is not entitled to compensation until the principal
realizes the profit, and there is no profit as yet, through the mere
signing of the contract of sale. (Fiege & Brown vs. Smith, Bell &
Co., 43 Phil. 118 [1922].)
(6) Reduction by principal of overprice. — In a case, the principal
agreed to give the sales agent a commission equivalent to the
overprice. The principal accepted a lower price with the result
that the principal was reduced from 2% to 1/2%. It was held that
the principal was liable for only 1/2% overprice as commission
in the absence of bad faith, fraud or fault on his part, which was
not imputed to him. He would be liable for the difference if he
accepted the reduced price to prejudice the agent. (Ramos vs.
Court of Appeals, 63 SCRA 331 [1975].)
(7) Commission payable by owner of property sold. — In a sale of
real property where a commission is payable to the agent, it is the
owner and not the buyer who must pay. (see Goduco vs. Court of
Appeals and M.B. Castro, 10 SCRA 275 [1964].)
(8) Grant of compensation on equitable ground. — The general
rule is that a broker or agent is not entitled to any commission
until he has successfully done the job given to him (see Ramos
vs. Court of Appeals, supra.), especially where his authority had
already expired. Conversely, where his efforts are unsuccessful or
where there was no effort on his part, he has no right to demand
compensation. An exception to the general rule is enunciated:
398
AGENCY
Art. 1875
(a) Where it appears that the offer of the owner to sell
his lands was formally accepted by the buyer after the exclusive authority in favor of the real estate broker to negotiate
the sale had expired and the broker was not the efficient procuring cause in bringing about the sale, for the buyer “never
wanted to be in any way guided by, or otherwise subject to,
the mediation or intervention of the [broker] relative to the
negotiation” as manifested by the request of the buyer to the
broker not to be present in the meeting between the buyer
and the owner, the court, while it denied the right of the broker to the payment of P1,380,000.00 as his professional fee
as computed under the agency agreement, noting that the
broker “had diligently taken steps to bring back together”
the owner and the buyer to whom the owner previously had
offered the sale of the property, granted in equity to the broker the sum of P100,000.00 by way of compensation for his
efforts and assistance in the transaction which was finalized
and consummated after the expiration of his exclusive authority. (Pratts vs. Court of Appeals, 81 SCRA 360 [1978].)
(b) With more reason, the broker or agent should be paid
his commission where he was the sufficient procuring cause
in bringing the sale,34 where said agent, notwithstanding
the expiration of his authority, nonetheless, took diligent
steps to bring back together the parties such that a sale was
finalized and consummated between them. (Prats vs. Court
of Appeals, 81 SCRA 360 [1978]; Manotok Brothers, Inc.
vs. Court of Appeals, 221 SCRA 224 [1993]; see Sanchez vs.
Medicard Philippines, Inc., 469 SCRA 347 [2005].)
(9) Right of agent’s companion to compensation. — Where there
was no understanding, express or implied, between the principal
and his agent that no part of the compensation to which the latter
34
In Dañon vs. Brimo (supra.), claimant-agent fully comprehended the possibility that
he may not realize the agent’s commission as he was informed that another agent was
also negotiating the sale and thus, compensation will pertain to the one who finds a purchaser and eventually effects the sale. Such is not the case herein. In Manotok, the private
respondent [broker] pursued with his goal of seeing that the parties reach an agreement
on the belief that he alone was transacting the business with the [buyer] as this was what
the petitioner [owner] made it to appear.
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
399
is entitled to receive can be paid to any companion or helper of his
— and as there is no prohibition in law against the employment
of a companion to look for a buyer of the principal’s land nor is
it against public policy — such companion or helper is entitled
to compensation and may, therefore be joined with the agent as
party to a case against the principal for recovery of compensation,
even if the principal never dealt, directly or indirectly with such
companion or helper.35 (L.G. Marquez & Gutierrez Lora vs.
Varela, 92 Phil. 373 [1952]; see Arts. 1892-1893.)
(10) Termination of agency contract. — Where no time for the
continuance of the contract is fixed by its terms, either party
is at liberty to terminate it at will, subject only to the ordinary
requirements of good faith. (Danon vs. Brimo & Co., 42 Phil. 133
[1921]; Ramos vs. Court of Appeals, 63 SCRA 331 [1975].)
(11) Validity of exclusive sales agency agreement. — An exclusive
sales agency agreement providing that during the continuance
of the agreement, the broker is entitled to the commission
irrespective as to whether the property is sold by the broker, the
seller, or a third party without the aid of the broker and that for
a period of three (3) months following its expiration, the broker
may still be entitled to the commission if the property were sold
by the seller “to a purchaser to whom it was submitted by you
(broker) during the continuance of such agency with notice
to me” (seller) has been upheld as not contrary to law, good
customs, or public policy. (see Art. 1306.)
Such agreement aims to pin down the seller to his obligation
to give what is due to his broker for his efforts during the life
of the agency. It seeks to prevent bad faith among calculating
customers to the prejudice of the broker particularly when the
negotiations have reached that stage where it would be unfair
35
Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise
provided in these Rules, join as plaintiffs or be joined as defendants in one complaint,
where any question of law or fact common to all such plaintiffs or to all such defendants
may arise in the action; but the court may make such orders as may be just to prevent any
plaintiff or defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest. (Rule 3, Rules of Court.)
400
AGENCY
Art. 1875
to deny the broker his commission just because the sale was
effected after the expiration of the broker’s contract. (F. Calero &
Co. vs. Navarette, [C.A.] 540 O.G. 705, Nov. 14, 1957.)
(12) Sale through another agent. — Where, however, no definite
period was fixed by the principal within which the broker might
effect the sale of principal’s property nor was he given by the
principal the exclusive agency on such sale, it was held that the
broker cannot complain of the principal’s conduct in selling the
property through another agent before the broker’s efforts were
crowned with success for “one who has employed a broker can
himself sell the property to a purchaser whom he has procured,
without any aid from the broker.” (Subido vs. Iglesia ni Cristo,
[C.A.] No. 9910-R, June 27, 1955.)
Right of agent to compensation
in case of double agency.
An agent acting at once for both contracting parties (e.g.,
vendor and vendee) assumes a double agency.
(1) With knowledge of both principals. — Such agency is disapproved of by law unless the agent acted with full knowledge and
free consent of both principals, or unless his employment was
merely to bring the parties together. In this case, recovery may
be had by the agent. (see Domingo vs. Domingo, 42 SCRA 131
[1971], cited under Art. 1891.) No public policy or principle of
sound morality is violated by contracts of double agency where
all the principals were fully advised and consented to the double
employment. Undoubtedly, if two persons desire, for example,
to negotiate a sale of property, they may agree to delegate to a
third person the power to fix the terms. It may be said that such
third person is an arbitrator chosen to settle differences between
his employers, an agency or office greatly favored in the law.
Of course, to relieve such double agent from suspicion,
it is necessary that it should appear that knowledge of every
circumstance connected with his employment by either party
should be communicated to the other, insofar as the same would
naturally affect his action, and when it is done, the right of such
agent to compensation cannot be denied on any just principle of
morals or of law.
Art. 1875
NATURE, FORM, AND KINDS OF AGENCY
401
The key here is in fully informing both parties.
(2) Without knowledge of both principals. — In case of such
double employment the agent can recover from neither, where
his employment by either is concealed from or not assented to by
the other.
Several reasons may be given for this rule. In law, as in
morals, it may be stated that as a principle, no servant can serve
two masters for either he will hate the one and love the other,
or else he will hold to the one and despise the other. Unless the
principal contracts for less, the agent is bound to serve him with
all his skill, judgment and discretion. Therefore, by engaging
with the second, he forfeits his right to compensation from the
one who first employed him. By the second engagement, the
agent, if he does not in fact disable himself from rendering to the
first employer the full quantum of service contracted for, at least
tempts himself not to do so. And for the same reason he cannot
recover from the second employer, who is ignorant of the first
engagement.
(3) With knowledge of one principal. — If the second employer
has knowledge of the first engagement, then both he and the agent
are guilty of the wrong committed against the first employer,
and the law will not enforce an executory contract entered into
in fraud of the rights of the first employer. It is no answer to
say that the second employer having knowledge of the first
employment should be liable on his promise, because he could
not be defrauded in the transaction. The contract itself is void as
against public policy and good morals, and both parties thereto
being in pari delicto, the law will leave them as it finds them. (Bell
vs. McConnel, 37 Ohio St. 396 [1881]; see also “Nature of relation
between principal and agent,” No. [3], under Art. 1868.)
Factors in fixing the amount
of attorney’s fees.
In fixing fees, lawyers should avoid charges which
overestimate their advice and services, as well as those which
undervalue them. A client’s ability to pay cannot justify a charge
in excess of the value of the service, though his poverty may
402
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Art. 1875
require a less charge, or even none at all. The reasonable requests
of brother lawyers, and of their widows and orphans without
ample means, should receive special and kindly consideration.
In determining the amount of the fee, it is proper to consider:
(1) The time and labor required, the novelty and difficulty
of the questions involved, and the skill requisite to conduct
properly the cause;
(2) Whether the acceptance of employment in the particular
case will preclude the lawyer’s appearance for others in cases
likely to arise out of the transaction, and in which there is a
reasonable expectation that otherwise he would be employed,
or will involve the loss of other business while employed in the
particular case or antagonisms with other clients;
(3) The customary charges of the bar for similar services;
(4) The amount involved in the controversy and the benefits
resulting to the client from the services;
(5) The contingency or the certainty of the compensation;
and
(6) The character of the employment, whether casual or for
an established and constant client. No one of these consideration
in itself is controlling. They are mere guides in ascertaining the
real value of the service.
In fixing fees, it should never be forgotten that the profession
is a branch of the administration of justice and not a mere moneygetting trade.36 (Sec. 12, Canons of Professional Ethics.)
36
Canon 20. — A LAWYER SHALL CHARGE ONLY FAIR AND REASONABLE
FEES.
Rule 20.01. — A lawyer shall be guided by the following factors in determining his
fees:
xxx
xxx
(c) The importance of the subject matter;
xxx
xxx
(f) The customary charges for similar services and the schedule of fees of the IBP
chapter to which he belongs;
xxx
xxx
(j) The professional standing of the lawyer.
Rule 20.02. — A lawyer shall, in cases of referral with the consent of the client, be
entitled to a division of fees in proportion to the work performed and responsibility
assumed.
Art. 1876
NATURE, FORM, AND KINDS OF AGENCY
403
ART. 1876. An agency is either general or special.
The former comprises all the business of the principal.
The latter, one or more specific transactions. (1712)
General and special agencies.
The distinction here is based on the scope of the business covered. A general agency must not be confused with one couched
in general terms (Art. 1877.) which is a special agency when it
involves only one or more specific transactions. (Art. 1876.)
Classes and kinds of agents.
Agents may be classified as express or implied, according
to the manner in which the agency is created; or as actual or
ostensible, with reference to their authority in fact. (2 C.J.S. 1035.)
According to the nature and extent of their authority agents
have been classified into universal, general, and special or
particular.
(1) A universal agent is one employed to do all acts that the
principal may personally do, and which he can lawfully delegate
to another the power of doing. (Ibid., 1037.) A contract creating
a universal agency normally includes the following delegation:
“full power and authority to do and perform any and every act
that I may legally do and every power necessary to carry out the
purposes for which it is granted.”
(2) A general agent is one employed to transact all the business of his principal, or all business of a particular kind or in
a particular place, or in other words, to do all acts, connected
with a particular trade, business, or employment. (Ibid., 1036.)
He has authority to do all acts connected with or necessary to
accomplish a certain job. A manager of a store is an example of a
general agent.
Rule 20.03. — A lawyer shall not, without the full knowledge and consent of the client, accept any fee, reward, costs, commissions, interest, rebate or forwarding allowance
or other compensation whatsoever related to his professional employment from anyone
other than the client.
Rule 20.04. — A lawyer shall avoid controversies with clients concerning his compensation and shall resort to judicial action only to prevent imposition of injustice or
fraud. (Code of Professional Responsibility.)
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404
Art. 1876
(3) A special or particular agent is one authorized to act in
one or more specific transactions, or to do one or more specific
acts, or to act upon a particular occasion. (Ibid.) An agent with
authority to sell a house is an illustration of a special agent. He
has no authority to act in matters other than that for which he
has been employed. His authority is to do only a particular act
or a series of acts of very limited scope. He has less power than a
general agent.
A universal agent may be viewed as an unlimited general
agent. Cases of universal agencies are rare since they can be
created only by clear and unequivocal language; and while a
principal may have as many special agents as occasions may
require and may have a general agent in each line of his business
and each of several places, he can only have one universal agent.
(3 Am. Jur. 2d 422-425.)
Special types of agents.
The more common special types of agents are the following:
(1) Attorney at law, or one whose business is to represent
clients in legal proceedings;
(2) Auctioneer, or one whose business is to sell property for
others to the highest bidder at a public sale;
(3) Broker, or one whose business is to act as intermediary
between two other parties such as insurance broker and real
estate broker;
(4) Factor (synonymous with commission merchant), or one
whose business is to receive and sell goods for a commission,
being entrusted with the possession of the goods involved in the
transaction. (see Art. 1903.);
(5) Cashier in bank, or one whose business is to represent a
banking institution in its financial transactions; and;
(6) Attorney-in-fact, infra.
Attorney-in-fact defined.
An attorney-in-fact is one who is given authority by his
principal to do a particular act not of a legal character. The term
is, in loose language, used to include agents of all kinds, but in
Art. 1876
NATURE, FORM, AND KINDS OF AGENCY
405
its strict legal sense, it means an agent having a special authority
created by deed. (3 C.J.S. 1037.)
Distinctions between a general agent
and a special agent.
(1) Scope of authority. — A general agent is usually authorized
to do all acts connected with the business or employment in
which the principal is engaged (e.g., manager of a shop), while a
special agent is authorized to do only one or more specific acts
(e.g., delivering of goods sold to a customer) in pursuance of
particular instructions or with restrictions necessarily implied
from the act to be done. (3 Am. Jur. 2d 422.)
ILLUSTRATIVE CASE:
Agent sold flags for principal without specific authorization.
Facts: P drew up a document addressed to A that said:
“This is to formalize our agreement for you to represent United
Flag Industry to deal with any entity or organization, private or
government, in connection with the marketing of our products
— flags and all its accessories. For your service, you will be
entitled to a commission of 30%.”
A sold 15,666 Philippine flags to the Department of
Education and Culture. P refused to pay A commission.
Issue: Could A represent P in the transaction in the absence
of a specific authorization for the sale?
Held: Yes. “One does not have to undertake a close scrutiny
of the document embodying the agreement between P and A
to deduce that the latter was instituted as a general agent.”
Indeed, it can easily be seen that no restrictions were intended
as to the manner the agency was to be carried out or in the
place where it was to be executed. The power granted to A is so
broad that it practically covers the negotiations leading to, and
the execution of, a contract of sale of P’s merchandise with any
entity or organization. As general agent, A had authority to do
all acts pertaining to the business of P.
A general agent usually has authority either expressly
conferred in general terms or in effect made general by
the usages, customs or nature of the business which he is
authorized to transact x x x.” (Siasat vs. Intermediate Appellate
Court, 139 SCRA 238 [1985].)
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406
Art. 1876
(2) Continuous nature of service authorized. — A general agent
is one who is authorized to conduct a series of transactions over
time involving a continuity of service, while a special agent is one
authorized to conduct a single transaction or a series of transactions not involving continuity of service (Ibid.) and covering a
relatively limited period of time. Thus, one is a general agent if
he is in continuous employment, although the employment consists of purchasing articles as the employer directs with no discretion as to the kinds, amounts or pieces to be paid, while one
employed to purchase a single article would be a special agent
although given the widest discretion as where one is directed to
purchase any suitable article as a wedding gift. (Restatement of
Law of Agency, Sec. 3[c].)
(3) Extent to which agent may bind principal. — A general agent
may bind his principal by an act within the scope of his authority
although it may be contrary to his special instructions, while a
special agent cannot bind his principal in a manner beyond or
outside the specific acts which he is authorized to perform on
behalf of the principal. (3 Am. Jur. 2d 422.)
(4) Knowledge/disclosure of limitations of power. — A special
agency is in its nature temporary and naturally suggests
limitations of power of which third persons must inform
themselves. A general agency is in its general nature, continuing
and unrestricted by limitations other than those which confine
the authority within the bounds of what is usual, proper, and
necessary under like circumstances. If there are other limitations,
the principal must disclose them. (Mechem on Agency, Sec. 739.)
The expertise of the agent or the amount of discretion given
to him is not relevant in making a distinction between general
and special agents.
ILLUSTRATIVE CASE:
Insurance agent agreed to insure a risk from date of application
in violation of principal’s instructions.
Facts: T made an application for fire insurance to A, agent
of P, insurance company. A agreed to insure from the date of
application. It appeared that the risk involved was of a special
kind, and P had forbidden A from taking that kind of risk.
Art. 1876
NATURE, FORM, AND KINDS OF AGENCY
407
The court found, however, that the risk entered into by A
was a general one.
Issue: Is P bound by the contract?
Held: Yes. “A restriction upon the power of an agent, not
known to persons dealing with him, limiting usual powers
possessed by agents of the same character, would not exempt
the principal from responsibility for his acts and contracts
which were within the ordinary scope of the business entrusted
to him, although he acted in violation of special instructions.”
(Ruggles vs. American Ins. Co., 144 N.Y. 415, cited in Teller, p. 19.)
(5) Termination of authority. — The apparent authority created
in a general agent does not terminate by the mere revocation of
his authority without notice to the third party. (see Art. 1922.) In
the case of special agent, the duty imposed upon the third party
to inquire makes termination of the relationship as between the
principal and agent effective as to such third party unless the
agency has been entrusted for the purpose of contracting with
such third party. (see Art. 1921.)
(6) Construction of instructions of principal. — It is a general
rule that the authority of a special agent must be strictly pursued.
Persons dealing with such an agent must at their peril inquire
into the nature and extent of his authority. (2 C.J. Sec. 223.) Where
the agent is general, statement by the principal with respect to
former’s authority would ordinarily be regarded as advisory in
nature only. Where the agent is special, they would be regarded
as words limiting the authority of the agent. This is but natural
for it should not be presumed in the absence of countervailing
circumstances that a general agency, with its consequent broad
powers and reposing of confidence is, without more, intended
to be limited in the extent of its authority by the principal’s
statements. (Teller, op. cit., pp. 19-20.)
Be that as it may, a general agency does not import unqualified
authority, and the implied power of any agent, however general,
must be limited to such acts as are proper for an agent to do,
and cannot extend to acts clearly adverse to the interests of the
principal, or for the benefit of the agent personally; and an agent
has no implied authority to do acts not usually done by agents
408
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Art. 1877
in that sort of business. The most general authority is limited to
the business or purpose for which the agency was created. (2 C.J.
Sec. 222.)
ART. 1877. An agency couched in general terms
comprises only acts of administration, even if the principal should state that he withholds no power or that
the agent may execute such acts as he may consider appropriate, or even though the agency should authorize
a general and unlimited management. (n)
Agency couched in general terms.
As to the extent of the power conferred, agency may be
couched in general terms (Art. 1877.) or couched in specific
terms. (Art. 1878.)
An agency couched in general terms may be a general agency
(Art. 1876, par. 1.) or a special agency. (Ibid., par. 2.) It includes
only acts of administration and an express power is necessary
to perform any act of strict ownership (Art. 1878.), even if the
principal states that (1) he withholds no power, or that (2) the
agent may execute such acts as he may consider appropriate, or
that (3) he authorizes a general or unlimited management. (Art.
1877.)
Whether the instrument be denominated as “general power
of attorney” or “special power of attorney,” what matters is
the extent of the power or powers conferred upon the agent or
attorney-in-fact. If the power is couched in general terms, then
only acts of administration may be deemed granted although the
instrument may be captioned as “special power of attorney”; but
where the power, for example, to sell or mortgage, is specified,
there can be no doubt that the agent may execute the act, although
the instrument is denominated as a general power of attorney.
(Veloso vs. Court of Appeals, 260 SCRA 593 [1996].)
Meaning of acts of administration.
It seems easy to answer that acts of administration are those
which do not imply the authority to alienate for the exercise
Art. 1877
NATURE, FORM, AND KINDS OF AGENCY
409
of which an express power is necessary. Yet what are acts of
administration will always be a question of fact, rather than of
law, because there can be no doubt that sound management will
sometimes require the performance of an act of ownership. (12
Manresa 468.) But, unless the contrary appears, the authority
of an agent is presumed to include all the necessary and usual
means to carry out the agency into effect. (Macke vs. Camps, 7
Phil. 553 [1907].)
(1) A person employed to sell goods in a retail store can sell
without special power of attorney because selling itself is an act
of administration.
(2) It has been held that the right to sue for the collection of
debts owing to the principal is not an incident of strict ownership,
which must be conferred in express terms. (German & Co. vs.
Donaldson, Sim & Co., 1 Phil. 63 [1901].)
(3) An attorney-in-fact empowered to pay the debts of the
principal and to employ attorneys to defend the latter’s interests
is impliedly empowered to pay attorney’s fees for services
rendered in the interests of the principal. (Municipal Council of
Iloilo vs. Evangelista, 55 Phil. 290 [1930].)
(4) A person who is made an attorney-in-fact with the same
power and authority to deal with property which the principal
might or could have done if personally present, may engage the
services of a lawyer to preserve the ownership and possession of
the principal’s property.
(5) Except where the authority for employing agents and
employees is expressly vested in the board of directors or
trustees of a corporation, an officer or agent who has control
and management of the corporation’s business, or a specific part
thereof, may bind the corporation by the employment of such
agents and employees as are usual and necessary in the conduct
of such business. But the contracts of employment must be
reasonable. (Yu Chuck vs. “Kong Li Po,” 46 Phil. 608 [1924].)
(6) The authority to take charge of certain properties
includes, unless it is otherwise agreed, the implied authority
to take reasonable measures appropriate to the subject matter,
to protect it against loss or destruction, to keep it in reasonable
410
AGENCY
Art. 1877
repair, to recover it if lost or stolen, and, if the subject matter is
ordinarily insured by the owners, to insure it. (2 Am. Jur. 122.)
The authority to manage or administer a land does not include
the authority to sell the same. (Cañeda vs. Puentespina, CA-G.R.
No. 52855-R, May 29, 1978.)
(7) An agent to manage, supervise, or oversee the business or
property of his principal has powers co-extensive in scope with
the business instructed to him, that is to say, implied authority to
do in that business or with the property whatever is usually and
customarily done in business or property of the same kind in the
same locality. (2 C.J.S. 1241-1242.)
(8) When the agent is entrusted with the custody of goods
which he delivers himself to the purchaser, there is implied
authority to collect and receive payment therefor. (Boice-Perrine
Co. vs. Kelley, 243 Mass. 327, 137 N.E. 731.)
(9) The pertinent portion of the special power of attorney
executed by the client expressly authorized its counsel “to appear
for and in its behalf in the above entitled case in all circumstances
where its appearance is required and to bind it in all said
instances.” Although the power of attorney does not specifically
mention the authority of counsel to appear and bind the client at
the pre-trial conference, the terms of the said power of attorney
are comprehensive enough as to include said authority. (Tropical
Homes, Inc. vs. Villaluz, 170 SCRA 577 [1989].)
(10) The authority to sell includes authority to make customary warranties and representations, but to sell only for cash
unless a course of dealing justifies the inference that the agent
had authority to sell on credit. Authority to buy is interpreted to
mean only for money if the principal has supplied the agent with
funds; otherwise, the agent can pledge the principal’s credit on
reasonable terms. (Babb & Martin, op. cit., p. 138.)
(11) The right of an agent to indorse commercial papers is a
responsible power and will not be lightly inferred. A salesman
with authority to collect money belonging to his principal
does not have the implied authority to indorse checks received
in payment. Any person taking checks made payable to a
corporation, which can only act by agents, does so at his peril,
Art. 1877
NATURE, FORM, AND KINDS OF AGENCY
411
and must abide by the consequences if the agent who indorses
the same is without authority. (Insular Drug Co. vs. National
Bank, 58 Phil. 683 [1933].)
But the principal is liable on checks issued by an agent
with a general power of attorney to issue checks, where such
checks were issued for the agent’s own benefit. The rule is that
the principal is liable on contracts entered into by his general
agent from improper motives or on contracts which represent
violation of his fiduciary duty to the principal. (Empire Trust Co.
vs. Cahan, 274 U.S. 474, cited in Teller, p. 228.)
(12) It is the general rule that an agent who solicits orders
and transmits them to his principal to be filled has no implied
authority to collect or to receive payment for the goods sold. The
purchaser will not be discharged by payment to him without
proof of further authority in the agent than the making of sales.
(Boice-Perrine Co. vs. Kelley, 243 Mass. 327, 137 N.E. 731.)
Under this principle, brokers and travelling salesmen who
do not have the possession of goods, and who sell for future
delivery to be paid for on delivery or a future time, are without
authority to collect payment for the goods. If the payment is
made to a person occupying that relation, the purchaser makes
him his agent to pay the seller, and, if he fails, it is the purchaser’s
loss and not the seller’s. (Fairbanks Morse & Co. vs. Dole & Co.,
159 So 859 [Miss.] 1925.)
(13) In a case where an agent with a power of attorney was
authorized to take, sue for, recover, collect, and receive any and
all sums of money and other things of value due his principal
(lessor) from the lessee, it was held that said power of attorney
did not authorize the agent to take articles belonging to the lessee,
hiding them in his house and denying to the owner of the articles
and the police authorities that he had them in his possession,
these being illegal acts not covered by his power of attorney,
and the agent, in the absence of satisfactory explanation as to his
possession, was liable for the crime of theft of such properties.
(Soriano vs. People, 88 Phil. 368 [1951].)
(14) The powers of the managing partner are not defined
under the provisions of the Civil Code on partnership. (see Arts.
412
AGENCY
Art. 1877
1800-1803, 1818.) Since according to well-known authorities, the
relationship between a managing partner and the partnership
is substantially the same as that of agent and the principal, the
extent of the power of the managing partner must, therefore,
be determined under the general principles of agency. And, on
this point, the law says that an agency created in general terms
includes only acts of administration, but with regard to the
power to compromise, sell, mortgage, and other acts of strict
ownership, an express power of attorney is required.
Of course, there is authority to the effect that a managing
partner, even without express power of attorney, may perform
acts affecting ownership if the same are necessary to promote
or accomplish a declared object of the partnership. But a sale
by a managing partner of real properties of the partnership
to pay its obligation without first obtaining the consent of the
other partners is invalid being in excess of his authority, as the
transaction is not for the purpose of promoting the object of the
partnership. (Goquiolay vs. Sycip, 108 Phil. 984 [1960] and 9
SCRA 603 [1963].)
(15) The authority to make a contract does not include authority to alter, rescind, waive conditions, render or receive performance, assign or sue upon it, for none of these acts is necessary or incidental to the making of the contract. (Babb & Martin,
op. cit., p. 138.)
(16) See Article 1878, Nos. 6, 7, and 8.
Construction of contracts of agency.
(1) Contracts of agency as well as general powers of attorney
must be interpreted in accordance with the language used by the
parties. (see Art. 1370.)
(2) The real intention of the parties is primarily to be
determined from the language used and gathered from the
whole instrument. (see Art. 1374.)
(3) In case of doubt, resort must be had to the situation,
surroundings, and relations of the parties. (see Art. 1371.)
(4) The intention of the parties must be sustained rather
than be defeated. (see Art. 1370.) So, if the contract be open to
Art. 1878
NATURE, FORM, AND KINDS OF AGENCY
413
two constructions, one of which would uphold while the other
would overthrow it, the former is to be chosen. (see Art. 1373.)
(5) The acts of the parties in carrying out the contract will
be presumed to have been done in good faith and in conformity
with and not contrary to the intent of the contract. (Liñan vs.
Puno, 31 Phil. 259 [1951].)
ART. 1878. Special powers of attorney are necessary
in the following cases:
(1) To make such payments as are not usually considered as acts of administration;
(2) To effect novations which put an end to obligations already in existence at the time the agency was
constituted;
(3) To compromise, to submit questions to arbitration, to renounce the right to appeal from judgment, to
waive objections to the venue of an action or to abandon a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;
(6) To make gifts, except customary ones for charity
or those made to employees in the business managed
by the agent;
(7) To loan or borrow money, unless the latter act
be urgent and indispensable for the preservation of the
things which are under administration;
(8) To lease any real property to another person for
more than one year;
(9) To bind the principal to render some service
without compensation;
(10) To bind the principal in a contract of partnership;
AGENCY
414
Art. 1878
(11) To obligate the principal as a guarantor or surety;
(12) To create or convey real rights over immovable
property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted
before the agency;
(15) Any other act of strict dominion. (n)
When special powers are necessary.
(1) Acts of strict dominion. — In the fifteen cases enumerated
are general acts of strict dominion or ownership as distinguished
from acts of administration. Hence, a special power of attorney
is necessary for their execution through an agent.
(2) Construction of powers of attorney. — Powers of attorney are
generally construed strictly and courts will not infer or presume
broad powers from deeds which do not sufficiently include
property or subject under which the agent is to deal. The act
done must be legally identical with that authorized to be done.
(Woodchild Holdings, Inc. vs. Roxas Electric & Construction Co.,
Inc., 436 SCRA 235 [2004].) However, the rule is not absolute
and should not be applied to the extent of destroying the very
purpose of the power. Furthermore, the instrument should
always be deemed to give such powers as are essential or usual
in effectuating the express powers. (Olaguer vs. Purugganan, Jr.,
575 SCRA 460 [2007].)
Authority in the cases enumerated in Article 1878 must be
couched in clear and unmistakable language.37 In other cases,
the authority need not be with special power, but may arise by
implication if it is reasonably necessary to the exercise of other
powers which are bestowed.
(3) Nature, not form of authorization. — Article 1878 refers to
the nature of the authorization, not its form. (Lim Pin vs. Liao
37
See, however Pelayo vs. Perez, 459 SCRA 475 (2005), under No. (5).
Art. 1878
NATURE, FORM, AND KINDS OF AGENCY
415
Tan, 115 SCRA 290 [1982]; Bravo-Guerrero vs. Bravo, 465 SCRA
244 [2005]; Gozun vs. Mercado, 511 SCRA 305 [2006].)
(a) A power of attorney is valid although no notary public
intervened in its execution. (Barretto vs. Tuason, 59 Phil. 845
[1934].) Article 1878 does not state that the special authority
be in writing. Be that as it may, the same must be duly
established by evidence other than the self-serving assertion
of the party claiming that such authority was verbally given
him. (see Home Insurance Co. vs. United States Lines Co., 21
SCRA 863 [1967].) A notarized power of attorney, however,
carries the evidentiary weight conferred upon it with respect
to its due execution. (Veloso vs. Court of Appeals, 260 SCRA
593 [1996].)
(b) The special power of attorney can be included in a
general power of attorney (hence, there is no need to execute
a separate and special power) when it specifies therein the act
or transaction (e.g., special power to sell) for which the special
power is required. The requirement of a special power of
attorney is met if there is a clear mandate from the principal
specifically authorizing the performance of act (Ibid.; BravoGuerrero vs. Bravo, supra; Estate of Lino Olaguer vs. Ongjico,
563 SCRA 373 [2009].)
To make payment.
Payment is the delivery of money or the performance in any
other manner of an obligation. (Art. 1232.) It is an act of ownership because it involves the conveyance of ownership of money
or property.
But when payment is made in the ordinary course of
management, it is considered a mere act of administration. It is
included in an agency couched in general terms (Art. 1877.) and
hence, no special power of attorney is needed. Thus, a special
power to make payment is implied from the authority to buy
a designated piece of land at a certain price. The authority to
execute or to indorse negotiable paper is ordinarily inferred only
when indispensable to the accomplishment of the acts the agent
is authorized to perform. Particularly rare is the situation in
AGENCY
416
Art. 1878
which the agent could bind the principal by an accommodation
signature. (Babb & Martin, op. cit., p. 139.)
To effect novation.
Novation is the extinction of an obligation through the
creation of a new one which substitutes it by changing the
object or principal conditions thereof, substituting a debtor, or
subrogating another in the right of the creditor. (Art. 1291.) Note
that the obligations must already be in existence at the time the
agency was constituted.
To compromise, etc.
A compromise must, be strictly construed. The grant of
special power regarding one of the acts mentioned in No. 3 of
Article 1878 is not enough to authorize the others. A judgment
based on a compromise entered into by an attorney without
specific authority from the client is null and void. Such judgment
may be impugned and its execution restrained in any proceeding
by the party against whom it is sought to be enforced. (Cosmic
Lumber Corp. vs. Court of Appeals, 265 SCRA 168 [1996]; see
Philippine Aluminum Wheels, Inc. vs. FASGI Enterprises, Inc.,
342 SCRA 722 [2000]; Rivero vs. Court of Appeals, 458 SCRA 714
[2005].)
(1) Compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced. (Art. 2028.) Arbitration is where the parties
submit their controversies to one or more arbitrators for decision.
(Art. 2024; see Art. 1880.) These are acts of ownership since they
involve the possibility of disposing of the thing or right subject of
the compromise38 (see Vicente vs. Geraldez, 52 SCRA 210 [1973];
Caballero vs. Deiparine, 60 SCRA 136 [1974].) or arbitration.
Confession of judgment stands on the same footing as compromise
38
Sec. 23. Authority of attorneys to bind clients. — Attorneys have authority to bind
their clients in any case by any agreement in relation thereto made in writing, and in taking appeals, and in all matters of ordinary judicial procedure. But they cannot, without
special authority, compromise their client’s litigation, or receive anything in discharge of
a client’s claim but the full amount in cash. (Rule 138, Rules of Court.)
Art. 1878
NATURE, FORM, AND KINDS OF AGENCY
417
of causes; so a counsel may not confess judgment except with the
knowledge and at the instance of the client. (Acener vs. Sison, 8
SCRA 711 [1963].)
But although the law expressly requires a special power
of attorney in order that one may compromise an interest of
another, it is neither accurate nor correct to conclude that its
absence renders the compromise agreement void. In such a case,
the compromise is merely unenforceable. This results from its
nature as a contract. It must be governed by the rules and the
law on contracts. (Dungo vs. Lopena, 6 SCRA 1007 [1962].)
(2) A special power of attorney is also necessary with respect
to the authority of the agent to waive: the right to appeal from a
judgment; objections to the venue of an action; and a prescription
already acquired. By prescription, one acquires ownership and
other real rights through the lapse of time. In the same way,
rights and actions are lost by prescription. (Art. 1106.)
To waive an obligation gratuitously.
This is condonation or remission. (Art. 1270.) The agent
cannot waive a right belonging to the principal without valuable
consideration or even for a nominal consideration. He cannot
bind the principal who is the obligee unless especially authorized
to do so.
A waiver may not be inferred when the terms thereof do not
explicitly and clearly prove an intent to abandon the right.
To convey or acquire immovable.
Note that No. (5) applies whether the contract is gratuitous
or onerous. (see Art. 1874.) Note also that it refers only to
immovables. (see No. 15.) Nos. (5) and (12) (infra.) refer to sales
made by an agent for a principal and not to sales made by
the owner personally to another, whether that other be acting
personally or through a representative. (Rodriguez vs. Court of
Appeals, 29 SCRA 419 [1969].)
It has been held that a wife, by affixing her signature to a
deed of sale on the space provided for witnesses, is deemed to
418
AGENCY
Art. 1878
have given her implied consent to the contract of sale. A wife’s
consent to the husband’s disposition of conjugal property does
not always have to be explicit or set forth in any particular
document so long as it is shown by acts of the wife that such
consent or approval was given. (Pelayo vs. Perez, 459 SCRA 475
[2005].)
A buyer has every reason to rely on a person’s authority to
sell a particular property owned by a corporation on the basis of
a notarized board resolution. The notarial acknowledgment in a
document is a prima facie evidence of the fact of its due execution.
(St. Mary’s Farm, Inc. vs. Prima Real Properties, Inc., 560 SCRA
704 [2008].)
To make gifts.
Gift or donation is an act of liberality whereby a person
disposes gratuitously of a thing or right in favor of another who
accepts it. (Art. 725.) An agent without special power from the
principal cannot make gifts.39 But the making of customary gifts
for charity, or those made to employees in the business managed
by the agent, are considered acts of administration.
To loan or borrow money.
In a loan of money, the borrower “is bound to pay to the
creditor an equal amount of the same kind and quality.” (Art.
1953.) The power to lend or borrow money is one with much
great possibility of abuse and is not ordinarily incident to a
general managerial agency. (2 C.J.S. 1294.)
(1) The power to borrow any amount of money which the
agent deems necessary cannot be interpreted as also authorizing
him to use the money as he pleases. (Hodges vs. Salas, 63 Phil.
567 [1936].)
(2) The exception in No. (7) refers to “borrow” and not to
“loan.” The agent, however, may be empowered to borrow
39
Art. 745. The donee must accept the donation personally, or through an authorized
person with a special power for the purpose, or with a general and sufficient power; otherwise, the donation shall be void. (630)
Art. 1878
NATURE, FORM, AND KINDS OF AGENCY
419
money. (Art. 1890.) But the authority to borrow money for the
principal is not to be implied from the special power of attorney
to mortgage real estate. (Phil. National Bank vs. Maximo Sta.
Maria, 29 SCRA 303 [1969].)
(3) The creditor should require the execution of a power of
attorney in order that one may be understood to have granted
another the authority to borrow on behalf of the former. (Rural
Bank of Caloocan, Inc. vs. Court of Appeals, 104 SCRA 151
[1981].)
(4) Authority to borrow money is rarely inferred unless
such borrowing is usually incident to the performance of acts
which the agent is authorized to perform for the principal
(Restatement of Agency, Sec. 74.), or unless it is impossible for
the agent to communicate with his principal and borrowing is
indispensable to the continuance of the business or to prevent a
very considerable loss. (Babb & Martin, op. cit., p. 139.)
Where the loans were contracted by the agent and the
purchases on credit were made to pay the wages of the laborers
and supply them with their needs, otherwise a stoppage of the
mining operations without having completed the extraction
of the ore therefrom would certainly have meant considerable
losses to the principal, the loans contracted by the agent were
held urgent and indispensable and a special power of attorney
was not imperative under the circumstances to bind the principal,
pursuant to Article 1878, par. 7. (Sta. Catalina vs. Espitero, 15
C.A. Rep. 1202, April 28, 1964.)
Note that No. 7 refers only to money and not to other fungible
things. (see Art. 1253.)
ILLUSTRATIVE CASE:
Owner of property mortgaged is sought to be made liable for loan
secured by debtor given authority to mortgage.
Facts: P granted to A a special power to mortgage the
former’s real estate. By virtue of said power, A secured a loan
from C (PNB) secured by a mortgage on said real estate.
Issue: Is P personally liable for said loan?
420
AGENCY
Art. 1878
Held: No. A special power to mortgage property is limited
to such authority to mortgage and does not bind the grantor
personally to other obligations contracted by the grantee in
the absence of any ratification or other similar act that would
estop the grantor from questioning or disowning such other
obligations contracted by the grantee.
Consequently, A alone must answer for said loan, and P’s
only liability is that the real estate authorized by him to be
mortgaged would be subject to foreclosure and sale to respond
for the obligations contracted by A. But he cannot be held
personally liable for the payment of such obligations.
It is not unusual in family and business circles that
one would allow his property or an undivided share in real
estate to be mortgaged to another as security either as an
accommodation or for valuable consideration, but the grant of
such authority does not extend to assuming personal liability,
much less solidary liability, for any loan secured by the grantee
in the absence of express authority given by the grantor. The
outcome would be different if the authority given were “to
borrow money and mortgage.” (Phil. National Bank vs. Sta.
Maria, 29 SCRA 303 [1969]; see De Villa vs. Fabricante, 105 Phil.
672.)
To lease realty for more than one year.
In the lease of things, the lessor gives to the lessee the enjoyment
or use of a thing for a price certain, and for a period which may
be definite or indefinite. (Art. 1643.)
(1) An unrecorded lease of real estate is not binding upon
third persons. (Art. 1648.) By implication, the lease of realty to
another person for one year or less is an act of mere administration
provided the lease is not registered.
(2) The requirement of special power of attorney extends to
renewal or extension of lease of real property to another.
(3) An agreement for the leasing of real property for a longer
period than one year is unenforceable unless made in writing.
(Art. 1403[2, e].) It follows that even if the agent is especially
authorized, the lease is not enforceable against the principal if it
is not in writing.
Art. 1878
NATURE, FORM, AND KINDS OF AGENCY
421
Note that No. 8 does not refer to lease of real property from
another person and to lease of personal property.
To bind the principal to render service
gratuitously.
The agent may, by contract, bind himself to render service
without compensation. (Art. 1875.) However, to bind the principal to that effect, a special power is necessary.
If the service is for compensation, the power may be implied.
To bind the principal in a contract of partnership.
By the contract of partnership, the partners bind themselves to
contribute money, property, or industry to a common fund with
the intention of dividing the profits among themselves. (Art.
1767.) The contract of partnership thus creates obligations the
fulfillment of which requires an act of strict ownership.
Furthermore, the principal must personally have trust and
confidence in the proposed partners.
To obligate principal as guarantor or surety.
By the contract of guaranty, the guarantor binds himself to
fulfill the obligation of the principal debtor in case the latter
should fail to do so. If the person binds himself solidarily, he is a
surety and the contract is called a suretyship. (Art. 2047.)
It has been held that a contract of guaranty or surety cannot
be inferred from the use of vague or general words. Thus, the
phrase “contingent commitment’’ set forth in the power of attorney cannot be interpreted to mean “guaranty.’’ (BA Finance Corp.
vs. Court of Appeals, 211 SCRA 112 [1992].) A power of attorney
given to sell or to lease the property of the principal and generally “to perform and execute all and every lawful and reasonable
act as fully and effectively as I might or could do if personally
present” does not operate to authorize the agent to sign in behalf
of the principal a surety bond in favor of the government in connection with the purchase of certain materials dredged from a
fish pond. The power to create a contract of suretyship cannot be
inferred; it must be expressed. (Director of Public Works vs. Sing
Juco, 53 Phil. 205 [1929].)
422
AGENCY
Art. 1878
A power of attorney to loan money does not authorize the
agent to make the principal liable as a surety for the payment of
the debt of a third person. (Bank of the Phil. Islands vs. Coster, 47
Phil. 594 [1925].) Similarly, the authority given by a corporation to
approve loans up to P350,000 without any security requirement
does not include the authority to issue guarantees even for an
amount much less than P350,000. (BA Finance Corp. vs. Court of
Appeals, supra.)
A contract of guaranty is unenforceable unless it is made in
writing. (Art. 1403[2, b].)
To create or convey real rights over
immovable property.
An agent cannot create or convey real rights like mortgage,
usufruct, easement, etc., over immovable property belonging
to his principal without special power. That is an act of strict
ownership. (see No. 5.) There is no principle of law by which
a person can become liable on a real estate mortgage which he
never executed either in person or by attorney-in-fact. (Philippine
Sugar Estates Development Co. vs. Poizat, 48 Phil. 536 [1926];
Rural Bank of Bombon, Inc. vs. Court of Appeals, 212 SCRA 25
[1992].)
To accept or repudiate an inheritance.
Any person having the free disposal of his property may
accept or repudiate an inheritance.40 (Art. 1044.) This act is one of
strict dominion; hence, the necessity of a special authority.
40
Art. 1045. The lawful representatives of corporations, associations, institutions and
entities qualified to acquire property may accept any inheritance left to the latter, but in
order to repudiate it, the approval of the court shall be necessary. (993a)
Art. 1046. Public official establishments can neither accept nor repudiate an inheritance without the approval of the government. (994)
Art. 1047. A married woman of age may repudiate an inheritance without the consent of her husband. (995a)
Art. 1048. Deaf-mutes who can read and write may accept or repudiate the inheritance personally or through an agent. Should they not be able to read and write, the inheritance shall be accepted by their guardians. These guardians may repudiate the same
with judicial approval. (996a)
Art. 1879
NATURE, FORM, AND KINDS OF AGENCY
423
To ratify obligations contracted before
the agency.
An agent cannot effect novation (supra.) of obligations
existing at the time of the constitution of the agency unless he be
specially authorized to do so. On the same principle, he cannot
ratify or recognize obligations contracted before the agency
without special power from the principal.
Any other act of strict dominion.
Generally, a sale or purchase of personal property is an act of
strict dominion. Hence, a special power is necessary in order that
the act shall be binding on the principal.
Thus, an agent appointed to manage a printing establishment
of his principal cannot sell a printing machine in said establishment. (Yu Eng Yu vs. Ranson Phil. Corp., [C.A.] 40 O.G. No. 8,
Supp. 65.) But a sale or purchase made in the ordinary course of
management is merely an act of administration and, therefore,
included in an agency couched in general terms. (Art. 1877.)
ART. 1879. A special power to sell excludes the power to mortgage; and a special power to mortgage does
not include the power to sell. (n)
Scope of authority to sell/
to mortgage.
(1) The agent cannot sell (Art. 1878, Nos. 5, 15.) or mortgage
(No. 12.) the property belonging to the principal without special
power. An authority to sell the principal’s property does not
carry with it or imply the authority to mortgage. And vice versa,
the power to sell is not to be implied from the special power to
mortgage (see Rodriguez vs. Pamintuan and De Jesus, 37 Phil.
876 [1918].), much less can it be construed to include an authority
to represent the principal in any litigation. (Valmonte vs. Court of
Appeals, 252 SCRA 92 [1996].) Sale (see Art. 1458.) and mortgage
(see Art. 2085.) are distinct from each other. In the absence of
special authority, the sale or mortgage will be unenforceable
against the principal as the agent “has acted beyond his powers.”
(Art. 1403[1]; Art. 1881.)
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(2) The sale proscribed by a special power to mortgage under Article 1879 is a voluntary and independent contract, and
not an auction sale resulting from extrajudicial foreclosure of a
real estate mortgage, which is precipitated by the default of the
mortgagor. Absent such default, no foreclosure can take place.
It matters not that the authority to extrajudicial foreclosure was
granted by an attorney-in-fact and not by the mortgagor personally. The stipulation in that regard, although ancillary, forms an
essential part of the mortgage contract and is inseparable therefrom. No creditor will agree to enter into a mortgage contract
without that stipulation intended for his protection. (Bicol Savings & Loan Ass’n. vs. Court of Appeals, 171 SCRA 630 [1989].)
(3) The power of attorney to sell any kind of realty belonging
and “might belong” to the principal covers not only the property
belonging to him at the time of the execution of the power, but
also such as he might afterwards have during the time it is in
force. (Katigbak vs. Tai Hing Co., 52 Phil. 622 [1928].)
(4) A mere authority to a real estate agent “to sell” property
at a certain price and for a certain commission does not carry with
it the implied power to make a contract of sale at such price in
behalf of the principal but as merely authorizing the agent to find
a purchaser and submit his offer to the principal for acceptance.
ILLUSTRATIVE CASE:
The authority given is merely to sell.
Facts: P told A, a real estate agent, that he (P) would sell at
a certain price his property and that he would give A a certain
commission.
Issue: Does A have authority to enter into a contract of sale
at such price?
Held: No. A mere authority of a real estate agent “to sell”
does not carry with it the implied power to make a contract of
sale in behalf of the principal. Courts have generally construed
contracts for the employment of agents for the sale of land as
merely authorizing the agent to find a purchaser and submit
his offer to the principal for acceptance, and consequently, as
not empowering the agent to execute a contract of sale in behalf
of his principal. (Raquiza vs. Lilles, 13 C.A. Rep. 343.)
Art. 1879
NATURE, FORM, AND KINDS OF AGENCY
425
(5) In the absence of express authorization, authority to sell
contemplates the sale for cash and not for credit. (Teller, op. cit.,
citing Paul vs. Stores, 4 Wis. 253.)
(6) Unless otherwise agreed, authority to buy or sell does not
include authority to rescind or modify the terms of the sale after
its completion, nor to act further with reference to the subject
matter except to undo fraud or to correct mistakes. Thus, it has
been held that a salesman of cash registers who made an accord
and satisfaction under the terms of which he accepted the return
of machines in satisfaction of the unpaid balance of the purchase
price acted beyond the scope of his authority. (Ibid., citing Wichita
Frozen Food Lockers vs. National Cash Register, 176 S.W. [2d]
161 [Tex.]; see Art. 1878[3].)
Contract giving agent exclusive
authority to sell.
The appointment of a person as exclusive agent to sell specified
property is not equivalent to giving the agent an exclusive power
of sale. In the former case, the principal may endeavor to sell
through his own efforts; in the latter, he may not so compete
with the agent. But if the principal appoints a person as exclusive
agent to sell the principal’s products in a specified territory, the
principal may not compete with the agent in that territory (Babb
& Martin, op. cit., p. 141.), either personally or by other agents, or
appoint another selling agent to sell his products.
An exclusive agency will not be created by implication
where the words of the contract do not naturally import such
a meaning. An agency contract, to have the effect of giving the
agent an exclusive territory which the principal may not invade
to make sales, must sufficiently designate the territory within
which the agent is to have exclusive rights. (3 C.J.S. 64-65.)
Contract giving agent exclusive
authority of sale.
It is often desirable for the protection of the agent that he
should be the exclusive agent and should be protected against
the chance of other agents reaping the benefit of his labor in
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Art. 1879
securing purchasers — hence, arise contracts for exclusive
agencies. The idea, however, that the owner shall be excluded
from the right to sell his own property under such a contract is so
inconsistent with the notion of ownership and the jus disponendi
thereto appertaining that clear and unequivocal language must
be employed to negate such right.
The reason is that, as is usual in such contracts, the broker does
not bind himself to do anything. He has incurred no obligation
to act, and the owner cannot even censure him for his inactivity.
The words “exclusive sale” may well mean exclusive agency to
sell — the idea being the owner shall employ no other agent and
that the broker shall have the only grant of power to sell that the
owner will execute. Hence, the words may be construed to be an
inhibition upon the owner to grant to any one else the power to
sell, rather than an inhibition upon his right to sell. (Roberts vs.
Harrington, 168 Wis. 217, 169 N.W. 603 [1918].)
Power to revoke and right to revoke broker’s
authority distinguished.
In dealing with cases of contract for the exclusive sale, the
distinction between the power to revoke and the right to revoke
must be carefully observed.
The principal always has the power to revoke but not having
the right to do so in those cases wherein he has agreed not to
exercise his power during a certain period. If in the latter case, he
does exercise his power, he must respond in damages. The same
conclusion may also be reached in other cases by distinguishing
between the authority and the contract of employment. The
authority may be withdrawn at any moment but the contract
cannot be terminated in violation of its terms, without making
the principal liable in damages. (1 Mechem [2d ed.], Sec. 619.)
ILLUSTRATIVE CASE:
Agent who was given exclusive sale of principal’s property seeks
to recover commission from principal who sold the property of his
own procuring.
Facts: P gave A the exclusive sale of P’s land promising to
pay A as commission 5% of the purchase price. A accepted the
Art. 1880
NATURE, FORM, AND KINDS OF AGENCY
employment under the contract, advertised the property at his
own cost, and incurred other expenses but did not produce a
customer willing to buy the property.
A few weeks later, P sold the property to a purchaser of his
own procuring. Thereupon, P notified A of such sale.
Issue: Is A entitled to claim his commission as damages for
breach of the contract?
Held: It depends. (1) Where life of exclusive agency sale contract
not specified. — Yes. Where the contract gives the broker the exclusive sale of the property, a sale by the owner to a purchaser
of his own procuring is a breach of contract if made while the
contract is in force. Ordinarily, in this class of contracts, the exclusive sale is given to a broker for a definite time. Where the
life of the contract is not specified, what is the life of the contract?
The rule of law is that where the contract is one of general
agency employment, as that of a salesman, with no provision
as to its duration, the employment is at will and may be
terminated at any time without violating the contract. “Where
the agency for the accomplishment of a particular transaction
or specific purpose [e.g., to procure a purchaser for one specific
piece of property as in this case] the law implies its continuance
for at least a reasonable time.” (2 C.J. 525.) In this case, the
court found that the reasonable time which the contract was to
endure had not expired at the time of the sale by P.
(2) Where exclusive sale is not given. — No. From the above,
it necessarily follows that A has no right of action against P in
case the reasonable time involved had expired at the time of the
sale by P.
Under the ordinary so-called listing contract of employment of a broker to procure a purchaser where the exclusive
sale is not given, it is generally held that the employment may
be terminated by the owner at will, and that a sale of the property by the owner terminates the employment without notice
to the broker. Such a listing contract does not give the broker
a reasonable time to procure a purchaser, but that he could be
dismissed at any time. (Harris vs. McPherson, 97 Com 164, 115 A
723 [1921].)
ART. 1880. A special power to compromise does not
authorize submission to arbitration. (1713a)
427
428
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Arts. 1881-1882
Scope of special power to compromise/
to submit to arbitration.
(1) The authority of the agent to compromise or make settlements of claims or accounts for the principal includes by implication the power to do whatever things are usual and necessary
which the principal himself can do to effectuate such compromise or settlement. (see 2 C.J.S. 1340.) But he is not thereby authorized to submit to arbitration because while the principal may
have confidence in the agent’s judgment, the arbitrator designated may not possess the trust of the principal.
(2) It would seem that the authority to submit to arbitration
does not include the power to compromise. The principal may
not have trust in the agent’s judgment in making a settlement.
(see Art. 1878[No. 3].)
ART. 1881. The agent must act within the scope of
his authority. He may do such acts as may be conducive
to the accomplishment of the purpose of the agency.
(1714a)
ART. 1882. The limits of the agent’s authority shall
not be considered exceeded should it have been performed in a manner more advantageous to the principal
than that specified by him. (1715)
Authority of an agent defined.
Authority is the power of the agent to affect the legal relations
of the principal by acts done in accordance with the principal’s
manifestation of consent to him. The authority of the agent
is the very essence — the sine qua non — of the principal and
agent relationship. This authority, unless it is otherwise agreed,
includes only authority to act for the benefit of the principal, and
the source of the authority is always the principal and never the
agent. (3 Am. Jur. 2d 469.)
Authority distinguished from power.
(1) As to existence. — While “authority” and “power” are
often used synonymously, the former may be considered the
Arts. 1881-1882
NATURE, FORM, AND KINDS OF AGENCY
429
source or cause, while the latter, the effect. Thus, an agent granted authority by the principal has thereby the “power” to act for
him, which is taken to mean “an ability on the part of the agent
to produce a change in a given legal relation, by doing and not
doing a given act.”
The power of the agent is also the limitation upon his ability
to bind the principal, for it is well-settled that an agent binds his
principal only as to acts within his actual or apparent authority.
(Ibid., 470.)
(2) As to scope. — Generally speaking, the extent of the agent’s
authority depends upon the purpose of the agency. As between
an agent and a principal, an act is within the authority of the
agent if it is not a violation of his duty to the principal, and it is
within his power if he has the legal ability to bind the principal
to a third person although the act constitutes a violation of his
duty to the principal. In fine, an agent with authority to do an act
has also the power to bind the principal, but the latter may exist
without the former.
So far as third persons are concerned, no distinction exists.
An act within the power of the agent is deemed within the scope
of his authority even if the agent has, in fact, exceeded the limits
of his authority (See examples under Arts. 1900 and 1911.), or he
has no authority whatever to do so as in the following cases:
(a) The ambit of the principal’s liability for the agent’s
torts are, under circumstances to be discussed later (see Art.
1910.), not limited to acts performed by the agent within his
authority, but to tortious acts done by the agent within the
scope of his employment, even though beyond the scope of
his authority;
(b) An agent may bind his principal in contract with a
third party, although the agent was unauthorized to do so,
where he has apparent or ostensible authority upon which
the third party relied. Apparent or ostensible authority is
proclaimed authority; and
(c) An agent, provided he be a general agent and not a
special agent (see Art. 1876.), possesses the power to subject
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Arts. 1881-1882
his principal to third party liability in respect to matters
incidental to that type of general agency, although the agent’s
contract was in point of fact unauthorized or forbidden if
usually within the authority of such a general agent. This is
true even though the principal is undisclosed. (see Teller, op.
cit., p. 7.)
(d) Case law has it that wherever the doing of a certain
act, or the transaction of a given affair, or the performance of
certain business is confided to an agent, the authority to so
act will generally carry with it by implication the authority to
do all the collateral acts which are the natural and ordinary
incidents of the main act or business authorized. (Guinnawa
vs. People, 468 SCRA 278 [2005], citing Park vs. Moorman
Manufacturing Co., 40 A.L.R. 2d 273 [1952].)
It will be seen that the power of the agent to subject his
principal to liability at the instance of third persons is much wider
than his authority. Of course, it is to authority that we must look
in determining (a) the nature of the relationship, i.e., whether it
be that of master and servant, principal and agent, or principal
and independent contractor, and (b) the agent’s ability normally
to subject his principal to liability in contract. (Teller, op. cit., p. 6.)
Kinds of authority.
An agent cannot act in behalf of the principal in any way
he sees fit. He can make the principal legally responsible only
when he is authorized by the principal to act the way he did. The
authority of the agent may be:
(1) Actual. — when it is actually granted, and it may be
express or implied. It is the authority that the agent does, in fact,
have. It results from what the principal indicates to the agent;
(2) Express. — when it is directly conferred by words (Art.
1869.);
(3) Implied. — when it is incidental to the transaction or
reasonably necessary to accomplish the main purpose of the
agency (Art. 1881.), and, therefore, the principal is deemed to have
Arts. 1881-1882
NATURE, FORM, AND KINDS OF AGENCY
431
actually intended the agent to possess although the principal has
said nothing about the particular aspect of the agent’s authority;
(4) Apparent or ostensible. — when it is conferred by words,
conduct or even by silence of the principal (see Art. 1869.) which
causes a third person reasonably to believe that a particular
person, who may or may not be the principal’s agent, has actual
authority to act for the principal. This specific type of authority is
another name for authority by estoppel or a species of the doctrine
of estoppel.41 It is also an implied authority but only in the sense
that it is not expressly conferred.
Apparent authority relied on by a third party to be possessed
by an agent may be created by the principal intentionally or by
negligence. It is something of a contradiction because it implies
absence of actual authority. The apparent authority of an agent
can only arise by the acts or conduct of the principal giving rise
to an appearance of authority and making the principal responsible
for certain agent’s action that were not really authorized at all.
Note that for apparent authority, an agent has authority if it appeared reasonable from the viewpoint of the third party, while
in the case of implied authority, the concern is in what appeared
responsible to the agent. Apparent authority is the term used
where no express or implied authority is present.
Both actual and apparent authority are embraced in the
agent’s “power” (supra.);
(5) General. — when it refers to all the business of the principal
(see Art. 1876.);
(6) Special. — when it is limited only to one or more specific
transactions (Ibid.); and
41
Art. 1431. Through estoppel an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person relying thereon. (Civil Code)
Sec. 2. Conclusive presumptions. — The following are instances of conclusive presumptions: (a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing is true, and to act upon
such belief, he cannot, in any litigation arising out of such declaration, act or omission, be
permitted to falsify it. xxx. (Rule 131, Rules of Court.)
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Arts. 1881-1882
(7) Authority by necessity or by operation of law. — when it
is demanded by necessity42 or by virtue of the existence of an
emergency. The agency terminates when the emergency has
passed.
EXAMPLE:
P gave a power of attorney to A authorizing him to sell P’s
car for at least P500,000.00 payable in cash. Here, the authority
of A to sell the car is express. If A sells the car for P600,000.00,
P is bound by the transaction as it is within the scope of A’s
authority. Conversely, P is not required to honor the transaction
if A sells the car for P400,000.00.
The authority of A includes the implied authority to receive
payment and to give a receipt as they are acts necessary to
accomplish the purpose of the agency. This type of authority is
what a person in a similar position customarily has unless the
principal has given indication to the contrary.
A does not have the implied authority to grant credit or
because it is simply not customarily for an agent to do so unless
expressly given by the principal.
Express authority and implied authority are both actual
authority.
If P privately instructed A not to consummate the sale,
the sale by A is binding upon P as A had apparent or ostensible
authority to sell. The effect is as if A has actual authority to sell.
The same is true if P had not authorized A to sell the
car but having knowledge that A was acting for him, kept
silent and after the consummation of the sale, received the
proceeds thereof from A. Here, A’s authority rests on estoppel
on the part of P to deny such authority. (see Art. 1911.) Thus,
if there is estoppel based upon the conduct of the principal,
it is unnecessary to distinguish between actual and apparent
authority since in both cases the principal is liable.
The authority given to A to sell the car is special because it
involves a particular transaction. A has no authority to use the
car for purposes of his own but he can use it in an emergency
42
For example, suppose the wife purchases certain basic necessaries and charges
them to the husband’s charge account. The husband cannot deny liability for payment
for the necessaries on the assumption that the purchase is demanded by the needs of the
family and the husband has the legal duty to provide such necessaries.
Arts. 1881-1882
NATURE, FORM, AND KINDS OF AGENCY
433
as, for example, to take a member of his family who is seriously
hurt to a hospital. In this case, the authority of A arises by
necessity or by the occurrence of an emergency.
If there is no opportunity to consult with the principal
or it is impracticable for the agent to communicate with the
principal and wait for instructions in emergency situations, an
agent has implied authority to take actions reasonable under
the circumstances including those that may be contrary to the
prior instructions of the principal.
When principal bound by act
of agent.
The principal is, of course, liable to the agent if he breaches
his contractual or any other duty to the agent. However, the
more important questions arising from the relationship relate to
the principal’s liability to third persons with whom the agent has
dealt.
(1) Requisites. — In order that the principal may be bound
by the act of the agent as to third persons and as to the agent
himself, there are two requisites:
(a) The agent must act within the scope of his authority;
and
(b) The agent must act in behalf of the principal.
(2) Authority possessed by agent. — The principal is bound by
either actual or apparent authority of the agent.
(a) So long as the agent has actual authority, express or
implied, the principal is bound by the acts of the agent on
his behalf, whether or not the third person dealing with the
agent believes that the agent has actual authority.
(b) Under the doctrine of apparent authority (estoppel),
the principal is liable only as to third persons who have been
led reasonably to believe by the conduct of the principal that
such actual authority exists, although none has been given.
The principal may or may not be liable to the apparent agent.43
43
1874.
See “Distinctions between agency by estoppel and implied agency,’’ under Article
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Arts. 1881-1882
(3) Authority ratified by another (prinicipal). — On occasion, a
person, who is in fact not an agent, may make a contract on behalf
of another, or he is an agent but he has exceeded his powers.
If the principal subsequently approves or affirms the contract,
an agency relationship is created by ratification, and neither the
principal nor the third person can set up the fact that the agent
had no authority or exceeded his powers. (see Art. 1901.)
When a person not bound by act
of another.
A person, therefore, is not bound by the act of another in the
following instances:
(1) The latter acts without or beyond the scope of his
authority in the former’s name; and
(2) The latter acts within the scope of his authority but in
his own name, except when the transaction involves things
belonging to the principal. (Art. 1883, par. 2.)
One who acts in his own behalf without authority from another, or in the name of a non-existent principal, naturally binds
himself alone. He cannot be considered an agent for any purpose, since there must be a principal in order to have an agent.
Unauthorized acts in the name
of another unenforceable.
An agent acting for a principal ordinarily incurs no personal
liability if he acts in a proper fashion. If the “agent” acts without
authority or in excess or beyond the scope of his authority, there
is no representation.
Such act is unauthorized and, therefore, unenforceable,
whether or not the party with whom the agent contracted was
aware of the limits of the agent’s power, unless the “principal”
ratifies the transaction before it is revoked by the other contracting
party (Arts. 1317, 1403[1].) or is in estoppel to deny the agent’s
authority. (supra; see Art. 1911.)
Arts. 1881-1882
NATURE, FORM, AND KINDS OF AGENCY
435
Where acts in excess of authority more
advantageous to principal.
The agent is not deemed to have exceeded the limits of
his authority should he perform the agency in a manner more
advantageous to the principal than that indicated by him (Art.
1882.) since he is authorized to do such acts as may be conducive
to the accomplishment of the purpose of the agency. (Art. 1881.)
This rule is of evident equity.
EXAMPLES:
(1) In the preceding example, if A sells the car to B in P’s
name for P500,000.00 cash, the transaction is valid. P and B are
the only parties. A assumes no personal liability.
(2) If A sells the car, without authority, or being authorized,
he sells the car to B for P400,000.00 cash, or for P500,000.00
payable in five (5) monthly installments, the transaction insofar
as P is concerned is an unauthorized act which renders it
unenforceable. Hence, P is not bound unless he ratifies the sale
and provided it has not already been revoked by B.
(3) Suppose A sold the car for P550,000.00 cash, did he
exceed his power? No, because the price is more advantageous
to P. What is prohibited is for A to sell the car at a price less
than P500,000.00 but there is no prohibition against selling it at
a better price if said price can be obtained. (see Tan Tiong Teck
vs. Securities and Exchange Commission, 69 Phil. 425.)
Since an agent may do such acts as may be conducive to
the accomplishment of the purpose of the agency, admissions
secured by the agent within the scope of the agency favors the
principal. This ought to be the rule for the acts or declarations of
an agent of a party within the scope of the agency and during its
existence are considered and treated in turn as the declarations,
acts and representations of his principal (see Sec. 26, Rule 130,
Rules of Court.) and may be given in evidence against such party.
(Bay View Hotel, Inc. vs. Ker & Co., Ltd., 116 SCRA 327 [1982].)
436
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Arts. 1881-1882
Liability of principal/agent for acts of agent
beyond his authority or power.
(1) Principal. — As a general rule, the principal is not bound
by the acts of an agent beyond his limited powers. In other
words, third persons dealing with an agent do so at their risk
and are bound to inquire as to the scope of his powers.
There are, however, four qualifications whereby the principal
is held liable:
(a) Where his (principal’s) acts have contributed to
deceive a third person in good faith;
(b) Where the limitations upon the power created by him
could not have been known by the third person;
(c) Where the principal has placed in the hands of the
agent instruments signed by him in blank (Strong vs. Gutierrez Repide, 6 Phil. 680 [1906]; see Art. 1887.); and
(d) Where the principal has ratified the acts of the agent.
(see Art. 1901.)
(2) Agent. — The agent who exceeds his authority is personally liable either to the principal or to the third party, in the absence of ratification by the principal.
(a) If the principal is liable to the third party on the
ground of apparent authority, the agent’s liability is to the
principal.
(b) If the principal is not liable to the third person because
the facts are such no apparent authority is present, then the
agent’s liability is to the third party.
(c) If the agent personally assumes responsibility for the
particular transaction, if the principal defaults he, in effect,
also becomes obligated as a co-principal.
Action must be brought by
and against principal.
(1) An action is not properly instituted when brought in
the name of an attorney-in-fact (“aporado”) and not in the name
of the principal, the real party-in-interest, and in such case the
Art. 1883
NATURE, FORM, AND KINDS OF AGENCY
437
complaint must be dismissed not upon the merits, but on the
ground that is has been improperly instituted. (Esperanza and
Bullo vs. Catindig, 27 Phil. 397 [1914].)
(2) When the principal is bound by the act of the agent, the
action must be brought against the principal, not against the
agent. The bringing of the action against the agent cannot have
any legal effect except that of notifying the agent of the claim.
Beyond such notification, the filing of the action can serve no
other purpose. There is no law giving any effect to such action
upon the principal. (Ang vs. Fulton Fire Insurance Co., 2 SCRA
945 [1961].)
ART. 1883. If an agent acts in his own name, the
principal has no right of action against the persons with
whom the agent has contracted; neither have such persons against the principal.
In such case, the agent is the one directly bound in
favor of the person with whom he has contracted, as if
the transaction were his own, except when the contract
involves things belonging to the principal.
The provisions of this article shall be understood to
be without prejudice to the actions between the principal and agent. (1717)
Kinds of principal.
The principal may be disclosed, partially disclosed, or undisclosed.
(1) Disclosed principal. — if at the time of the transaction
contracted by the agent, the other party thereto has known that
the agent is acting for a principal and of the principal’s identity.
(see Macias & Co. vs. Warner Barnes & Co., 43 Phil. 155 [1922];
Commercial Bank & Trust Co. of the Phil. vs. Republic Armored
Car Service Corp., 9 SCRA 142 [1963]; Resolution on motion for
new trial.) This is the usual type of agency.
(2) Partially disclosed principal. — if the other party knows
or has reason to know that the agent is or may be acting for a
principal but is unaware of the principal’s identity. The partially
438
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Art. 1883
disclosed principal may enforce against the third person the
contract of the agent like any disclosed principal. Similarly, the
third person has a right of action against the principal. In sum,
the liability of the third party and the principal is the same as
in the case of a disclosed principal, except that the agent is also
liable to the third party, unless they agree otherwise.
(3) Undisclosed principal. — if the party has no notice of the
fact that the agent is acting as such for a principal. (see 3 Am. Jur.
2d 665.)
If a person purports to act for a non-existent principal,
obviously he is liable to the party with whom he contracted.
Since there is no principal, there is no agent at all; the person
merely claims to be one.
Agency with undisclosed principal.
In order that an agent may bind his principal (whether
identified by name or not), he must act on behalf of the latter (see
Art. 1868.) and within the scope of his authority. (Art. 1881.)
(1) General rule. — Article 1883 speaks of a case where the
agent (a) being authorized to act on behalf of the principal, (b)
acts instead in his own name. In such case, the general rule is that
the agent is the one directly liable to the person with whom he
had contracted as if the transaction were his own.
The reason for the rule is that there is no representation of
the principal when the agent acts in his own name. In effect,
the resulting contractual relation is only between the agent and
the third person. Therefore, the principal cannot have a right of
action against the third person nor the third person against him.44
44
Under the Negotiable Instruments Law (Act No. 2031.), parol evidence is inadmissible to charge a party not appearing on the face of the instrument. The pertinent provisions are the following:
“Sec. 18. Liability of person signing in trade or assumed name. — No person is liable
on the instrument whose signature does not appear thereon, except as herein otherwise
expressly provided.
But one who signs in a trade or assumed name will be liable to the same extent as if
he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. — The signature of any party may be
made by a duly authorized agent. No particular form of appointment is necessary for this
purpose; and the authority of the agent may be established as in other cases of agency.
Art. 1883
NATURE, FORM, AND KINDS OF AGENCY
439
(see Lim vs. Ruiz y Rementeria, 15 Phil. 367 [1910]; Herranz
& Garriz vs. Ker & Co., 8 Phil. 162 [1907]; Smith Bell & Co. vs.
Sotelo Matti, 44 Phil. 874 [1923]; Behn, Meyer & Co. vs. Banco
Español-Filipino, 51 Phil. 253 [1927]; Ortega vs. Bauang Farmers
Cooperative Marketing Association, 106 Phil. 867 [1959]; Lim Tek
Goan vs. Azores, 70 Phil. 363 [1940].) The third person cannot
very well allege that he was misled by any representation of the
agent since he did not know of the existence of the undisclosed
principal.
An agent who enters into a contract in his own name without
disclosing the identity of his principal renders himself personally
liable even though the third person knows that he is acting as
agent, unless it affirmatively appears that it was the mutual
intention of the parties to the contract that the agent should not
be bound. (2 C.J. Sec. 488.) It is a well-settled principle that the
agent shall be liable for the act or omission of the principal only if
the latter is undisclosed. (Maritime Agencies & Securities, Inc. vs.
Court of Appeals, 187 SCRA 346 [1990].) Note that the exception
in Article 1883 does not include knowledge by the third party
that the agent who is acting in his own name is acting for another.
(2) Exception. — The exception to the rule that an agent acting
in his own name does not bind the principal is when the contract
involves things belonging to the principal. (Art. 1883, par. 2; see
Gold Star Mining Co., Inc. vs. Lim-Jimena, 25 SCRA 597 [1968].)
In such case, the contract is considered as entered into between
the principal and the third person.
This exception is necessary for the protection of third persons
against possible collusion between the agent and the principal. It
applies only when the agent has, in fact, been authorized by the
principal to enter into the particular transaction, but the agent,
instead of contracting for and in behalf of the principal, acts in
Sec. 20. Liability of person signing as agent, etc. — Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal
or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal
liability.’’
440
AGENCY
Art. 1883
his own name. (Phil. National Bank vs. Agudelo y Gonzaga, 58
Phil. 635 [1933]; Manubay vs. Picache, 2 C.A. Rep. 1034.)
According to this exception (when things belonging to the
principal are dealt with), the agent is bound to the principal
although he does not assume the character of such agent and
appears acting in his own name. This means that in the case of
this exception, the agent’s apparent representation yields to the
principal’s true representation and that, in reality and in effect,
the contract must be considered as entered into between the
principal and the third person. Consequently, if the obligations
belong to the former, to him alone must also belong the rights
arising from the contract. Thus:
(a) The fact that the money with which the property was
bought by the agent belonged to the principal, the exception
established in Article 1883 is applicable. (Sy-Juco and Viardo
vs. Sy-Juco, 40 Phil. 634 [1920].)
(b) The fact that the agent sold as owner thereof the
property of the principal and that he personally executed the
deed of sale may be only a violation of the agency on his
part, without, however, affecting his authority to sell it. The
question is not what representation he made and/or what
he did to sell it, but whose property he sold. If the property
he sold belonged to the principal and he was authorized to
sell the same, whatever the agent said or did to effect the sale
is beside the point. (Nicolas vs. Bormacheco, Inc., [C.A.] 70
O.G. 3971 [1973].)
(c) Where the commission agent of the plaintiffshipowner personally obligated himself to transport the
goods of the defendant, the latter is liable to the plaintiff for
freightage and other charges due under the contract and paid
to the agent after the defendant had been informed of the
ownership of the vessel, although the agent did not assume
the character of such agent and appeared to have acted in his
own name. The agent and the defendant are solidarily liable
to the plaintiff. If the principal can be obliged to perform
his duties under the contract, then it can also demand the
enforcement of its rights under the contract. (National Food
Art. 1883
NATURE, FORM, AND KINDS OF AGENCY
441
Authority vs. Intermediate Appellate Court, 184 SCRA 166
[1990].)
(3) Remedy of principal. — The foregoing is without prejudice
to the principal’s right to demand from the agent damages for
his failure to comply with the agency. (Ibid., par. 3; Art. 1884,
par. 1.) The rule in this jurisdiction is that where merchandise is
purchased from an agent with undisclosed principal and without
knowledge on the part of the purchaser that the vendor is merely
an agent, the purchaser takes title to the merchandise and the
principal cannot maintain an action against him for the recovery
of the merchandise or for damages, but can only proceed against
the agent. (Aivad vs. Filma Mercantile Co., 49 Phil. 816 [1926].)
(4) Remedy of third person. — Although according to Article
1883, when the agent acts in his own name he is not personally
liable to the person with whom he enters into a contract when
things belonging to the principal are the subject thereof, yet such
third person has a right of action not only against the principal
but also against the agent, when the rights and obligations which
are the subject-matter of the litigation cannot be legally and
juridically determined without hearing both of them. (Beaumont
vs. Prieto, 41 Phil. 670 [1921].)
Section 13, Rule 3 of the Rules of Court specifically permits
the plaintiff to sue several defendants in the alternative, when he
is uncertain against which of them he is entitled to relief, with a
view to ascertaining who among them is liable. Thus, where the
alleged principal denies the authority of the agent to act in his
name, the latter must be given a chance to prove that he really
had such authority. And if the former succeeds in establishing
such lack of authority on the part of the supposed agent, only the
latter would be liable.
EXAMPLES:
(1) P authorized A to bid for him in the construction of
a certain building. A acted in his own name, that is, without
disclosing that his bid was on behalf of P.
If the bid of A was the lowest, only A and the owner of
the building would be bound to each other. But A is liable to P
under the contract of agency.
442
AGENCY
Art. 1883
(2) P authorized A to borrow money and to mortgage P’s
real property. A negotiated a loan to himself and signed the
mortgage in his own behalf and not in behalf of P.
The mortgage is not binding upon P. In order to bind the
principal by a mortgage on real property executed by an agent,
it must upon its face purport to be made and signed in the name
of the principal. It is not enough merely that the agent was, in
fact, authorized to mortgage, if he has not acted in the name
of the principal. (see Phil. Sugar Estates Dev. Co. vs. Poiza, 48
Phil. 536 [1926].)
(3) P authorized A to sell the former’s car. A sold the car to
B. A acted in his own name. Here, the contract involves a thing
belonging to the principal. The sale is completely valid. The
contract is deemed entered into between P and B. So B can sue
P in case the car has hidden defects.
(4) P told A to buy a car. A bought a car from B with money
belonging to P. A acted in his own name. B and P have a right of
action against each other. Thus, P can sue B in case the car has
hidden defects.
(5) P authorized A to buy certain merchandise. A bought
from B the merchandise in his own name, but really for the
account of P. B has an option to look to either P or A for payment
unless:
(a) B trusted A exclusively; or
(b) by the usage and understanding of business the
agent (A) only is held; or
(c) unless the special circumstances of the case reveal
that only the agent was intended to be bound and the seller
(B) knew it, or was chargeable with knowledge of it. (Wing
Lee Compradoring Co. vs. Bark “Manonggahela,” 44 Phil.
464 [1923].)
(6) B purchased certain goods from A who was P’s agent.
Neither P nor A notified B that A was acting as agent of P. B
believes that A was the owner of the goods and paid for the
goods in full to A who acted in his own name.
P has no right of action against B for the price of the goods.
“It is well-settled that the rights of an undisclosed principal
are subject to claims acquired in good faith against the agent.
In other words, a third person who contracts in ignorance of
the existence of a principal can set up against the principal
Art. 1883
NATURE, FORM, AND KINDS OF AGENCY
who sues upon the contract any defenses and equities which
he could have set up against the agent had the latter been in
reality the principal suing in his behalf.” (Lovelace vs. Reliable
Garage, 125 S.E. 877.)
(7) A purchased merchandise from T upon credit authorized by P, but without disclosing P’s name. Before the agency
is disclosed to T, payment is subsequently made by P in good
faith to A for T. A did not pay T. In this case, P would not be liable to T.
ILLUSTRATIVE CASES:
1. Third person brings action against agent of undisclosed
principal.
Facts: A, agent, signed under a trade name used by P, his
principal, in conducting the latter’s business. T did not know
that A was acting as agent of P. He sought to hold A liable partly
because the principal was undisclosed.
Issue: Is the defense of A that he was acting as agent of P
good?
Held: No. Personal liability may be visited on A since
the use of the trade name was not sufficient disclosure of P’s
identity to give A an agency status as a matter of law. (Saco
Dairy Co. vs. Thompson Norden, 35 Atl. [2d], 857 [Mol], cited in
Teller, p. 223.)
________
________
________
2. Undisclosed principal brings action against seller for breach
of warranty.
Facts: A bought a horse from T for P but in A’s name and
without disclosure of the agency.
Issue: Is an action for breach of warranty of soundness of the
horse maintainable in the name of P, though before unknown
as the principal?
Held: Yes. The principal may claim all his rights, though
not at first known, just as if he had been known, with the single
limitation that the other party shall not lose any right which
he would have against the agent if the agent were principal as
he had first been supposed to be. The reason for the doctrine
is that it is but just that every man should have what really,
443
AGENCY
444
Art. 1883
though secretly, belongs to him, so far as he can obtain it
without injuring another by appearing in his true character as
owner. (Wooddruff vs. McGeKee, 30 Ga. 159 [1960].)
________
________
________
3. Seller refused to sign contract of sale after discovering the
identity of the buyer (undisclosed principal) who acted through an
agent.
Facts: P had been in T’s employ but had been discharged
for misconduct. Wishing to buy a parcel of land from T, and
knowing that T would not entertain any offer he might make,
P procured A, a friend, to buy the property for him without
disclosing the agency. T refused to sign the agreement when he
discovered that P was the real buyer.
Issue: Is P entitled to specific performance?
Held: Yes. The agreement which P seeks to enforce is not one
in which any personal qualifications possessed by A formed a
material ingredient, but is a simple agreement for sale of land
in consideration of a lump sum to be paid. It is an agreement
which T would have entered into with any other person. It is
well-settled that the benefits of such agreement is assignable
and that the assignee can enforce specific performance of it.
(Syster vs. Randall & Sons, 1 Ch. 939 [1926].)
________
________
________
4. Charterer’s agent is sued for loss/damage to cargo which
took place during the voyage.
Facts: TFC, a non-resident foreign corporation, chartered
from H shipping a vessel for the shipment of goods to the
Philippines with Atlas as consignee. The goods were insured by
Atlas with X Company. MAS was appointed as the charterer’s
(TFC’s) agent and MC as the shipowner’s (H’s) agent. The
charterer assumed responsibility for loading, storage and
discharging at the ports visited, while the owner, for the care of
the cargo during the voyage.
Atlas filed a claim for losses/damages to the cargo during
the voyage. As subrogee of the consignee, X brought suit for
reimbursement of the amount paid to Atlas, against H, MAS,
and MC. TFC was not impleaded and so beyond the jurisdiction
of the court.
Issue: Are the defendants liable?
Art. 1883
NATURE, FORM, AND KINDS OF AGENCY
445
Held: (1) Both H and MC are liable. However, since
X’s complaint against MC was filed beyond the one-year
prescriptive period provided under the Carriage of Goods by
Sea Act (C.A. No. 65.), only H is liable.
(2) As regards the goods damaged or lost during
unloading, the charterer is liable therefor, having assumed this
activity under the charter party “free of expense to the vessel.”
The difficulty is that TFC has not been impleaded in these
cases and so is beyond the court’s jurisdiction. The liability
imposable upon it cannot be borne by MAS which, as a mere
agent, is not answerable for injury caused by its principal. It is
a well-settled principle that the agent shall be liable for the act
or omission of the principal only if the latter is undisclosed.
MAS did not represent itself as a carrier and indeed
assumed responsibility only for the unloading of the cargo,
i.e., after the goods were already outside the custody of the
vessel. In supervising the unloading of the cargo and issuing
Daily Operations Report and Statement of Facts indicating
and describing the day-to-day discharge of the cargo, MAS
acted in representation of the charterer and not of the vessel. It,
thus, cannot be considered a ship agent. (Maritime Agencies &
Services, Inc. vs. Court of Appeals, 187 SCRA 346 [1990].)
The question is whether the consideration of the contracting
party enters as an element of the contract. If it does and the
defendant was induced by a deception as to the real party, the
contract may not be enforced against the one deceived. Thus,
a contract to lend money is not enforceable by the borrower’s
undisclosed principal, whether or not security is to be given.
(Shields vs. Cayne, 148 Iowa 313, 127 N.W. 63 [1910].)
ILLUSTRATIVE CASE:
Buyer returned the thing bought upon discovering the identity of
seller (undisclosed principal) who acted through an agent.
Facts: P, knowing that T would not deal with him, employed
A to act as his agent, though ostensibly as principal in selling
oxen to T. The transaction was consummated in this manner,
but when T learned of the facts, he returned the oxen.
Issue: In an action by P, based on the allegation that title
passed to T, has P the right to recover the purchase price?
446
AGENCY
Art. 1883
Held: No. “There may be good reason why one should be
unwilling to buy a pair of oxen that had been owned or used
or were claimed by a particular person, or why he should be
unwilling to have dealings with that person; and as a man’s
right to refuse to enter into contract is absolute, he is not
obliged to submit the validity of the reasons to a court or jury.”
(Winchester vs. Howard, 97 Mass. 303, cited in Teller, p. 123.)
— oOo —
447
Chapter 2
OBLIGATIONS OF THE AGENT
ART. 1884. The agent is bound by his acceptance
to carry out the agency and is liable for the damages
which, through his non-performance, the principal may
suffer.
He must also finish the business already begun on
the death of the principal, should delay entail any danger. (1718)
Obligations, in general, of agent
to principal.
(1) Good faith and loyalty to his trust, agent’s first duty. — As
has been pointed out (see discussions under Art. 1868.), the
relationship existing between principal and agent is a fiduciary
one, demanding conditions of trust and confidence.1 Accordingly,
1
(15) How Far a Lawyer May Go in Supporting a Client’s Cause. — The lawyer owes
“entire devotion to the interest of the client, warm zeal in the maintenance and defense
of his right and the exertion of his utmost learning and ability,” to the end that nothing
be taken or be withheld from him, save by the rules of law, legally applied. No fear of
judicial disfavor or public unpopularity should restrain him from the full discharge of his
duty. In the judicial forum, the client is entitled to the benefit of any and every remedy
and defense that is authorized by the law of the land, and he may expect his lawyer to assert every such remedy or defense. But it is steadfastly to be borne in mind that the great
trust of the lawyer is to be performed within and not without the bounds of the law. The
office of attorney does not permit, much less does it demand of him for any client, violation of law or any manner of fraud or chicanery. He must obey his own conscience and
not that of his client. (Canons of Professional Ethics.)
Canon 19. — A LAWYER SHALL REPRESENT HIS CLIENT WITH ZEAL WITHIN
THE BOUNDS OF THE LAW.
Rule 19.01. — A lawyer shall employ only fair and honest means to attain the lawful objectives of his client and shall not present, participate in presenting or threaten
447
448
AGENCY
Art. 1884
in all transactions concerning or affecting the subject matter of
the agency, it is the duty of the agent to act with the utmost good
faith and loyalty for the furtherance and advancement of the
interests of the principal. The duty of good faith is also called
the fiduciary duly which imposes upon the agent the obligation
of faithful service. The duty to be loyal to the principal demands
that the agent look out for the best interests of the principal as
against his own or those of the third party.
It is immaterial in the application of this rule that the
agency is one coupled with interest (see Art. 1927.), or that the
compensation given the agency is small or nominal, or that it is a
gratuitous agency. (3 C.J.S. 6-7.)
(a) Presumption. — An agent’s acts which tend to violate
his fiduciary duty are not only invalid as to the principal,
but are also against public policy. In the absence of proof to
the contrary, however, the presumption arises that an agent
has performed his duty in good faith, and the principal, until
notice is received of a breach of relational duties, may rely
upon his agent’s faithfulness. (Ibid., 7.)
(b) General rule as to loyalty when not applicable. — The
general rule as to loyalty does not apply to cases where no
relation of trust or confidence exists between the parties, as
where the agent is bound merely as an instrument, more
properly as a servant, to perform a service, or where there is
no showing of an agency relationship. (Ibid.)
(2) Obedience to principal’s instruction. — An agent must obey
all lawful orders and instructions of the principal within the
scope of the agency. If he fails to do so, he becomes liable for any
loss the principal incurs even though he can show that he acted
in good faith or exercised reasonableness. Even a gratuitous
to present unfounded criminal charges to obtain an improper advantage in any case or
proceeding.
Rule 19.02. — A lawyer who has received information that his client has, in the
course of the representation, perpetrated a fraud upon a person or tribunal, shall promptly call upon the client to rectify the same, and failing which he shall terminate the relationship with such client in accordance with the Rules of Court.
Rule 19.03. — A lawyer shall not allow his client to dictate the procedure in handling
the case. (Code of Professional Responsibility.)
Art. 1884
OBLIGATIONS OF THE AGENT
449
agent must follow instructions or become responsible for any
loss resulting from failure to do so. But an agent is not liable if he
violates the principal’s instructions for a good reason. Related to
the agent’s duty to obey instructions is the duty to keep within
the limits of his authority when acting for the principal. An agent
must know the extent of his authority. If he is in doubt, he should
ask the principal for clarification.
(3) Exercise of reasonable care. — By accepting an employment
whose requirements he knows, without stipulating otherwise,
the agent impliedly undertakes that he possesses a degree of skill
reasonably or ordinarily competent for the performance of the
service, and that in performing his undertaking, he will exercise
reasonable care, skill and diligence. He does not agree that he
will make no mistake whatsoever, or that he will exercise the
highest skill or diligence, but he does agree that he will exercise
reasonable skill, and that he will take the usual precautions
(Mechem, Sec. 524, p. 360; see Art. 1909; British Airways vs. Court
of Appeals, 285 SCRA 450 [1998].) as a reasonably careful agent
would under similar circumstances. Failure to do so constitutes
a breach of his duty.
ILLUSTRATIVE CASES:
1. In attempting a settlement of a controversy, a lawyer lost
sight of a statute of limitations which had run against his client.
Facts: P’s wagon suffered from a collision with a traincar
operated by T Corporation, the collision being caused by the
negligence of the driver of T. A (lawyer), on taking charge of
the case, attempted a settlement, and the controversy extended
until a six (6) months’ statute of limitations had run against P.
A claimed that he was misled by the conduct of the
corporation and he was satisfied that it would pay.
Issue: Is A guilty of negligence?
Held: Yes. The duty of A was not discharged when he
communicated the offer of T to P who made no reply. It was
his duty to know the provisions of the law and to apply his
knowledge. To lose sight of the statute was to fail in that degree
of care and skill to which the client is entitled. If he had written
a warning to P that the period of limitation was running out
AGENCY
450
Art. 1884
and that if P were meditating legal proceedings he should have
given instructions at once, that might have satisfied his (A’s)
obligation to P. (Fletcher & Sons vs. Lubb Booth & Helliwell, 1 K.B.
275 [1919].)
________
________
________
2. Agent, in violation of instruction of principal, delivered a
note entrusted to him by principal, to a person who misappropriated
the note.
Facts: P delivered a note to A to get discounted, instructing
him “not to let the note get out of his reach without receiving
the money.” A delivered the note to T, who promised to
get it discounted and bring back the money, but instead
misappropriated the note.
Issue: Is A liable for the conversion2 of the note?
Held: Yes. The delivery to T was unauthorized and wrongful
because it was contrary to the express directions of P. It was an
unlawful interference with P’s property which resulted in loss
and that interference and disposition constituted a conversion.
A had no more right to deliver the note to T to take away,
any more than he had to pay his own debt with it. Morally,
there might be a difference, but in law, both acts would be a
conversion, each consisting in exercising an unauthorized
dominion over P’s property. (Laverty vs. Snerthen, 68 N.Y. 522
[1877].)
________
3.
________
________
Agent violated instructions as to price.
Facts: A (broker) sold property of P at a price below P’s
instructions.
Issue: Is A liable for conversion of the property?
Held: No. In this case A did nothing with the property
but what he was authorized to do. He had a right to sell and
deliver the property. He disobeyed instructions as to price only
and was liable for misconduct, but not for conversion of the
property, a distinction which, in a practical sense, may seem
technical, but it is founded probably upon the distinction
2
Conversion is the unauthorized exercise of the right of ownership over goods or
property of another person.
Art. 1884
OBLIGATIONS OF THE AGENT
451
between an unauthorized interference with the property itself
and the avails or terms of sale. (Dufresne vs. Hutchinson, 3 Taunt.
117, and Sarjeant vs. Blunt, 16 Johns. 74, cited in the Laverty case.)
Specific obligations of agent
to principal.
They are the following:
(1) To carry out the agency which he has accepted;
(2) To answer for damages which through his performance
the principal may suffer (Ibid.);
(3) To finish the business already begun on the death of the
principal should delay entail any danger (Ibid.);
(4) To observe the diligence of a good father of a family in the
custody and preservation of the goods forwarded to him by the
owner in case he declines an agency, until an agent is appointed
(Art. 1885.);
(5) To advance the necessary funds should there be a
stipulation to do so (Art. 1886.);
(6) To act in accordance with the instructions of the principal,
and in default thereof, to do all that a good father of a family
would do (Art. 1887.);
(7) Not to carry out the agency if its execution would
manifestly result in loss or damage to the principal (Art. 1888.);
(8) To answer for damages if there being a conflict between
his interests and those of the principal, he should prefer his own
(Art. 1889.);
(9) Not to loan to himself if he has been authorized to lend
money at interest (Art. 1890.);
(10) To render an account of his transactions and to deliver
to the principal whatever he may have received by virtue of the
agency (Art. 1891.);
(11) To distinguish goods by countermarks and designate
the merchandise respectively belonging to each principal, in the
case of a commission agent who handles goods of the same kind
and mark, which belong to different owners (Art. 1904.);
452
AGENCY
Art. 1884
(12) To be responsible in certain cases for the acts of the
substitute appointed by him (Art. 1892.);
(13) To pay interest on funds he has applied to his own use
(Art. 1896.);
(14) To inform the principal, where an authorized sale of
credit has been made, of such sale (Art. 1906.);
(15) To bear the risk of collection, should he receive also on a
sale, a guarantee commission (Art. 1907.);
(16) To indemnify the principal for damages for his failure
to collect the credits of his principal at the time that they become
due (Art. 1908.); and
(17) To be responsible for fraud or negligence. (Art. 1909.)
Obligation to carry out the agency.
A person is free to refuse to be an agent (Art. 1885.) but once
he accepts the agency, he is bound to carry it out in accordance
with its terms in good faith (Art. 1159.) and following the
instructions, if any, of the principal. (Art. 1887.) He is normally
expected to exercise the degree of care and skill that is reasonable
under the circumstances. By contract, the parties may make the
agent’s duty of diligence in carrying out the agency either stricter
or more linient.
If the agent fulfills his duty, he is not personally liable unless
he expressly binds himself. (Art. 1897.)
Obligation to answer for damages.
On the other hand, upon his failure to do so, he is liable
for the damage which the principal may suffer. This rule is an
application to agency of the general rule in contracts that any
person guilty of fraud, negligence, or delay in the fulfillment of
his obligation, or who in any other manner fails to comply with
the terms thereof, shall be liable for damages. (Art. 1170; see Art.
1909.) Having accepted the agency when he was free to refuse it,
the agent betrays the confidence reposed on him if he does not
fulfill the mandate.
Art. 1884
OBLIGATIONS OF THE AGENT
453
The damages to which the principal is entitled are those
which result from the agent’s non-performance. As there can
be no indemnity when there has been no damage, the principal
must prove his damages and the amount thereof. (11 Manresa
504.)
ILLUSTRATIVE CASE:
Creditor-assignee neglected in its duty to collect the sums due
the debtor-assignor from the latter’s debtors, thereby allowing such
funds to be exhausted by other creditors.
Facts: A (PNB) had opened a letter of credit and advanced
thereon $120,000.00 for 8,000 tons of hot asphalt in favor of P.
Of this amount, 2,000 tons worth P280,000.00 were released and
delivered to P under a trust receipt guaranteed by a surety. To
pay for the asphalt, P constituted A, its assignee and attorneyin-fact, to receive and collect from D (Bureau of Public Works)
the amount aforesaid out of funds payable to A. The assignment
stipulated that the power of attorney shall remain irrevocable
until P’s total indebtedness to A has been fully liquidated.
A regularly collected from D for about 8 months.
Thereafter, for unexplained reasons, A stopped collecting from
D the money falling due in favor of P before the debt was
fully collected, thereby allowing such funds to be taken and
exhausted by other creditors.
Issue: Is A answerable for negligence in failing to collect the
sums due its debtor (P) from the latter’s debtor (D)?
Held: Yes. A is guilty of neglect in collecting from D (not
from P, the principal debtor), contrary to its duty as holder of
an exclusive and irrevocable power of attorney to make such
collections since an agent is required to act with the care of
a good father of a family (Art. 1887.) and becomes liable for
the damages which the principal may suffer through his nonperformance. It must not be forgotten that A’s power to collect
was expressly made irrevocable, so that D could very well
refuse to make payments to P, the principal debtor himself,
and a fortiori, reject any demands by the surety. A’s negligence
exonerated the surety. (Phil. National Bank vs. Manila Surety &
Fidelity Co., Inc., 14 SCRA 776 [1965].)
454
AGENCY
Arts. 1885-1886
Obligation to finish business upon
principal’s death.
Although the death of the principal extinguishes the agency
(Art. 1919[3].), the agent has an obligation to conclude the
business already begun on the death of the principal. The rule is
in accord with the principles of equity. But the duty exists only
should delay entail any danger.
The agency shall also remain in full force even after the death
of the principal if it has been constituted in the common interest
of the latter and of the agent, or in the interest of a third person
who has accepted the stipulation in his favor. (Art. 1930.) Where
an agent makes use of the power of attorney after the death of his
principal, the agent has the obligation to deliver the amount collected by him by virtue of said power to the administrator of the
estate of the principal. (Ramos vs. Cavives, 94 Phil. 440 [1954].)
ART. 1885. In case a person declines an agency, he
is bound to observe the diligence of a good father of a
family in the custody and preservation of the goods forwarded to him by the owner until the latter should appoint an agent. The owner shall as soon as practicable
either appoint an agent or take charge of the goods. (n)
Obligation of person who declines
an agency.
In the event a person declines an agency, he is still bound to
observe the diligence of a good father of a family (see Art. 1163.)
in the custody and preservation of the goods forwarded to him
by the owner. This rule is based on equity. The owner, however,
must act as soon as practicable either (1) by appointing an agent
or (2) by taking charge of the goods.
The obligation of an agent who withdraws from an agency is
provided in Article 1929.
ART. 1886. Should there be a stipulation that the
agent shall advance the necessary funds, he shall be
bound to do so except when the principal is insolvent.
(n)
Art. 1887
OBLIGATIONS OF THE AGENT
455
Obligation to advance necessary
funds.
As a rule, the principal must advance to the agent, should
the latter so request, the sums necessary for the execution of
the agency. (Art. 1912.) The contract of agency, however, may
stipulate that the agent shall advance the necessary funds. (see
Art. 1159.) In such case, the agent is bound to furnish such funds
except when the principal is insolvent. The exception is based
on the principal’s obligation to reimburse the agent. Incidentally,
the insolvency of the principal is a ground for extinguishment of
agency. (Art. 1912[3].)
In certain cases, the principal is not liable for the expenses
incurred by the agent. (see Art. 1918.)
ART. 1887. In the execution of the agency, the agent
shall act in accordance with the instructions of the principal.
In default thereof, he shall do all that a good father
of a family would do, as required by the nature of the
business. (1719)
Instructions (of principal) defined.
Instructions are private directions which the principal may
give the agent in regard to the manner of performing his duties
as such agent but of which a third party is ignorant. They are said
to be secret if the principal intended them not to be made known
to such party.
Instructions distinguished from
authority.
The distinctions are:
(1) Authority (see Arts. 1881, 1882.), the sum total of the
powers committed or permitted to the agent by the principal,
may be limited in scope and such limitations are themselves
a part of the authority, but instructions direct the manner of
transacting the authorized business and contemplates only a
456
AGENCY
Art. 1887
private rule of guidance to the agent and are independent and
distinct in character;
(2) Authority relates to the subject with which the agent is
empowered to deal or the kind of business or transactions upon
which he is empowered to act, while instructions refer to the
manner or mode of his action with respect to matters which in
their substance are within the scope of permitted action;
(3) Limitations of authority are operative as against those
who have or are charged with knowledge of them (see Art. 1900.),
while instructions limiting the agent’s authority are without
significance as against those dealing with the agent with neither
knowledge nor notice of them; (see Art. 1902.) and
(4) Authority is contemplated to be made known to the
third person dealing with the agent, while instructions are not
expected to be made known to those with whom the agent deals.
(see 2 C.J.S. 1200-1202.)
Effect of violation of principal’s instructions.
(1) Liability of principal to third person. — If an act done by an
agent is within the apparent scope of the authority with which he
has been clothed, it matters not that it is directly contrary to the
instructions of the principal. The principal will, nevertheless, be
liable unless the third person with whom the agent dealt knew
that he was exceeding his authority or violating his instructions.
(3 Am. Jur. 2d 628.)
Third persons dealing with an agent do so at their peril and
are bound to inquire as to the extent of his authority but they are
not required to investigate the instructions of the principal. In
other words, the principal after clothing an agent with apparent
powers, cannot, by means of private communications with the
agent, limit the authority which he allows the agent to assume.
(Ibid., 486-487; see Art. 1902.) The principal will be liable to third
persons, under the doctrine of estoppel (see Art. 1911.), for any
unauthorized acts of the agent who exceeds the instructions
given to him.
(2) Liability of agent to principal. — infra.
Art. 1887
OBLIGATIONS OF THE AGENT
457
EXAMPLES:
(1) P writes to B that A is authorized to buy certain
merchandise. P privately instructs A not to buy but merely to
obtain B’s lowest price. In violation of said instruction, A buys
the merchandise.
In this case, the sale is binding upon P under the doctrine
of estoppel because A has apparent authority to make the
purchase although it is not in accordance with the instruction
given.
(2) P employed A to sell P’s horse at the best possible
price, with private direction that A may receive P10,000.00, but
no less. A sold the horse as agent of P for only P8,000.00 to T.
In this case, P is bound by the sale. The permission to sell
for P10,000.00 and the direction not to sell for less, are not
ordinarily to be communicated to T, although intended to
control the action of A, and are not to be regarded as limitations
upon A’s authority. P trusts A, who has discretion on the matter,
and “it would be most mischievous to hold such direction
as a condition, upon a compliance with which depended the
validity of the [sale].” (Hatch vs. Taylor, 10 N.H. 538 [1840].) A’s
violation of the instruction makes him liable to P.
Note: If there is no evidence showing that P gave A authority
to sell the horse, P is not bound unless he is in estoppel. Agency
cannot be proved by the mere declaration of the agent that he
had been given the authority.3
Obligation to act in accordance with
principal’s instructions.
(1) Duty to obey reasonable and lawful instructions. — It is the
fundamental duty of the agent to obey all the reasonable and
lawful instructions given to him by his principal. That the agent
shall, for the time being, put his own will under the direction of
another, is one of the primary elements in the relation. (Mechem,
3
Sec. 29. Admission by co-partner or agent. — The act or declaration of a partner or
agent of the party within the scope of his authority and during the existence of the partnership or agency, may be given in evidence against such party after the partnership or
agency is shown by evidence other than such act or declaration. x x x. (Rule 130, Rules
of Court.)
AGENCY
458
Art. 1887
Sec. 1244.) He must follow instructions even if he thinks they
are capricious or unwise. He violates his duty of obedience
whenever he disregards or deviates from such instructions. But
an agent need not follow instructions that are outside the scope
of the agency relationship agreed upon or that may subject him
to unreasonable risk of injury to himself.
(2) Liability for loss or damage. — If the agent exceeds, violates,
or fails to act upon such instructions, he will be liable to the
principal for any loss or damage resulting therefrom. Thus, if an
agent fails to effect an insurance as instructed, or sells on credit
or for a less price where he has been given instruction to sell
for cash, or for a certain price, or sells to irresponsible persons
when instructed to sell only to those of undoubted solvency, or
fails to take security for a loan as instructed, he is liable for the
consequent loss. (see 3 C.J.S. 29-30.)
(3) Duty to act in good faith and with due care. — In the absence
of specific instructions of the principal, the agent shall do all that
a good father of a family taking care of the business as if it were
his own would do as required by the nature of the business. (Art.
1887, par. 2.) If he acts in good faith and with due care, the agent
is not liable for losses due to errors or mistakes of judgment as
regards to matters with which he is vested with discretionary
powers. It will be presumed that the agent acted in good faith
and in accordance with his power as he understood it. (Liñan vs.
Puno, 31 Phil. 529 [1915].)
EXAMPLE:
P ordered A, his broker, to sell 10,000 shares at a minimum price of P1.00 per share. All the transactions in the market showed that the said shares were being traded at P1.10 per
share.
Now, if A sold the shares at only P1.00 per share, P is entitled
to recover the difference of P0.10 for each of the 10,000 shares.
Good faith and ordinary prudence demand that A should sell
the shares at the price most profitable to P.
(4) Exemption from liability for failure of undertaking. — The
agent has the power (not the right) in many cases to bind his
Art. 1887
OBLIGATIONS OF THE AGENT
459
principal even when he acts beyond his authority. Accordingly,
the law imposes upon him the duty not to exceed the authority given him by his principal. However, when an agent, in executing the orders and commissions of his principal, carries out
the instructions he has received from his principal, and does not
appear to have exceeded his authority or to have acted with negligence, deceit, or fraud, he cannot be held responsible for the
failure of his principal to accomplish the object of the agency.
(Gutierrez Hermanos vs. Oria Hermanos, 30 Phil. 491 [1915]; G.
Puyat & Sons, Inc. vs. Arco Amusement Company, 72 Phil. 402
[1941].)
Since an agent is required to exercise only ordinary care,
skill, and diligence, he is not, in the absence of an agreement, an
insurer of the success of his undertaking, and does not guarantee
the principal against incidental losses. (3 C.J.S. 36.)
EXAMPLE:
Suppose in the preceding example, A was given the
discretion to sell the shares if he believes it would be profitable
to P or not to sell them if he believes their price would still go
up. A sold the shares at P1.10 per share. The next day the price
rose to P1.30 a share.
In this case, A is not liable to P if he acted in good faith for
losses suffered by P due to A’s error of judgment.
(5) Right to disobey principal’s instructions. — The agent
may disobey the principal’s instruction where it calls for the
performance of illegal acts, or where he is privileged to do so to
protect his security interest in the subject matter of the agency.
EXAMPLE:
A has lien on P’s goods (see Art. 1914.) in A’s possession to
the extent of all moneys advanced by A to P. (see Art. 1912.) P
directs A to return the goods or sell them on credit.
A is not bound to comply with P’s orders until P has repaid
all advances made by A. Unless privileged, A’s disobedience
subjects him to liability in damages and, if material, justifies P
in terminating the agency. (Babb & Martin, op. cit., p. 142.)
460
AGENCY
Arts. 1887
When departure from principal’s
instructions justified.
(1) A departure from instructions may be justified by a sudden
emergency. Where some unexpected emergency or unforeseen
event occurs which will admit no delay for communication with
the principal, the agent is justified in adopting the course which
seems best to him under the circumstances. A company foreman
may be instructed to call a certain physician in case of accident.
Surely, the foreman is justified in calling another physician if a
serious accident occurs and he is unable to communicate with
either the named physician or his principal.
The rule is applicable only where the principal cannot be
consulted and where the circumstances cannot admit delay.
(Wyatt & Wyatt, op. cit., p. 276.)
(2) Ambiguous instructions are another instance which may
justify an agent in not following instructions. The agent will not
be liable if he chooses reasonably one of two possible interpretations. Customs and usage may aid in the interpretation of ambiguous instructions but not to the extent of overruling positive
instructions to the contrary. Nor will the agent be justified in following ideas of his own which are not within any interpretation
of the instructions. (Ibid.)
Where instructions are ambiguous, the agent is not chargeable
with disobedience or its consequences in case he makes an
honest mistake and adopts a construction different from that
intended by the principal. (2 C.J. Sec. 374.) If the instructions
are ambiguous, the agent cannot disregard them altogether. He
fulfills his duty, when acting in good faith, he interprets them in a
manner that is reasonable under the circumstances. It is the duty
of the principal to couch his instructions in clear terms.
(3) An agent may not be said to have breached the agency
contract by reason of an insubstantial departure from the principal’s
instructions, which does not affect the result. However, a
departure cannot usually be termed “insubstantial” in the face of
the principal’s countervailing instruction, for the principal has a
right to determine what he will consider important.
Arts. 1888-1889
OBLIGATIONS OF THE AGENT
461
But it has been said that a trivial mistake will not be held a
bar to the agent’s claim for compensation. Thus, if A is instructed
to execute a deed on July 1st but it is mistakenly executed on
July 2nd without damage to principal, it would seem that the
principal should not be able to treat the departure so seriously as
to constitute it a breach of the agency contract. (Teller, op. cit., pp.
133-134.)
ART. 1888. An agent shall not carry out an agency if
its execution would manifestly result in loss or damage
to the principal. (n)
When agent shall not carry out
agency.
The agent, upon acceptance of the agency, is not bound in all
cases to carry out the agency (Art. 1884.) in accordance with the
instructions of the principal. (Art. 1887.) Thus, the agent must
not carry out the agency if its execution would manifestly result
in loss or damage to the principal.
The reason for Article 1888 is obvious. The duty of the agent
who is merely an extension of the personality of the principal is
to render service for the benefit of the principal and not to act to
his detriment. Furthermore, an agent must exercise due diligence
in carrying out the agency. (Arts. 1884, 1887, par. 2.)
ART. 1889. The agent shall be liable for damages if,
there being a conflict between his interests and those of
the principal, he should prefer his own. (n)
Obligation not to prefer his own interests
to those of principal.
(1) Reason for the rule. — Agency being a fiduciary relation,
the agent is required to observe utmost good faith and loyalty
towards his principal. He must look after the principal’s interests
as if they were his own. He is not permitted without the knowledge
and consent of the principal, to assume two distinct and opposite
characters in the same transaction — acting for himself and
AGENCY
462
Art. 1889
pretending to act for his principal. (3 Am. Jur. 2d 595.) He is
prohibited from dealing in the agency matter on his own account
and for his own behalf without the consent of his principal, freely
given with full knowledge of all the circumstances which might
affect the transaction. An agent, therefore, is liable for damages
if, there being a conflict between his interests and those of the
principal, he should prefer his own. (Art. 1889.)
As the law does not distinguish, the rule is the same whether
the agency is onerous or gratuitous.
(2) Basis of the rule. — The underlying basis of the rule
precluding an agent from engaging in self-dealing is to shut the
door against temptation and keep the agent’s eye single to the
rights and welfare of his principal. The rule is one of preventive,
not remedial justice, which operates however fair the transaction
may have been — however free from every taint of moral wrong.
(3 Am. Jur. 2d 595.)
The principal, however, may waive the benefit of the rule
so far as he is concerned, if he does so with full knowledge of
the facts; but in the absence of such waiver, the rule is absolute.
(Mechem, op. cit., p. 346.) It has been held that an agent who
has been authorized to sell some merchandise cannot bind the
principal by selling to himself (agent) directly or indirectly. It
results that the principal is not required to fill orders taken by the
agent from his own sub-agent unless the principal ratifies such
sale after he has full knowledge of the facts. (Barton vs. Leyte
Asphalt, 46 Phil. 938 [1924].)
EXAMPLES:
(1) P authorized A to buy specified goods. A must not sell
P goods belonging to him (A) without the full knowledge and
assent of P. Such sale is voidable although the price may have
been just. The reason is that A’s obligation to P requires him to
buy at the lowest possible price while his self-interest prompts
him to sell at the highest price obtainable. P, however, may elect
to ratify the sale.
(2) Similarly, if P authorized A to sell goods, A must not
sell to himself either directly or indirectly. The reason is that his
Art. 1890
OBLIGATIONS OF THE AGENT
463
duty to sell at the highest price for the principal conflicts with
his interest to buy at the lowest price possible.
(3) P authorized A to sell specified goods for a certain price.
If A instead sells goods of the same kind and quality belonging
to him for the same price to B, A, is liable for damages. He
should not prefer his own interests to those of P.
(3) Where agent’s interests are superior. — Normally, where
there is a conflict between the agent’s own interests and those
of the principal, the agent has the duty to prefer the principal’s
interest over his own. However, where the agent’s interests are
superior, such as where he has a security interest in goods of the
principal in his possession, he may protect this interest even if in
so doing he disobeys the principal’s orders or injures his interest.
An agent, to be sure, is not required to expose himself to
great physical risks not within the contemplation of the parties,
or to perform services when he is ill. On the other hand, if the
conflict resulted from his breach of a duty owed to the principal,
the agent cannot prefer his own interest. (see Sell on Agency, p.
134; Seavy on Agency, p. 262.)
ART. 1890. If the agent has been empowered to borrow money, he may himself be the lender at the current
rate of interest. If he has been authorized to lend money
at interest, he cannot borrow it without the consent of
the principal. (n)
Obligation not to loan to himself.
The agent cannot, without a special power of attorney, loan
or borrow money. (see Art. 1878[7].)
(1) If he has been expressly empowered to borrow money,
he may himself be the lender at the current rate of interest for
there is no danger of the principal suffering any damage since
the current rate of interest would have to be paid in any case if
the loan were obtained from a third person.
(2) If the agent has been authorized to lend money at interest,
he cannot be the borrower without the consent of the principal
because the agent may prove to be a bad debtor. There is here a
464
AGENCY
Art. 1891
possible conflict of interest. (see Art. 1890.) The transaction may
thus be prejudicial to the principal.
ART. 1891. Every agent is bound to render an account of his transactions and to deliver to the principal
whatever he may have received by virtue of the agency,
even though it may not be owing to the principal.
Every stipulation exempting the agent from the obligation to render an account shall be void. (1720a)
Obligation to render accounts.
It is the duty of the agent to account for and to deliver to the
principal (or an authorized third party) all money and property
which may have come into his hands or of a sub-agent appointed
by him by virtue of or as a result of the agency.4 This includes
gifts from the third party in connection with the agency.
(1) Source of profits. — It is immaterial whether such money
or property is the result of the performance or violation of the
agent’s duty, if it be the fruit of the agency. If his duty be strictly
4
(11) Dealing with Trust Property. — The lawyer should refrain from any action
whereby for his personal benefit or gain, he abuses or takes advantage of the confidence
reposed in him by his client. Money of the client or collected for the client or other trust
property coming into the possession of the lawyer should be reported and accounted for
promptly, and should not under any circumstances be commingled with his own or be
used by him. (Canons of Professional Ethics.)
Canon 16. — A LAWYER SHALL HOLD IN TRUST ALL MONEYS AND PROPERTIES OF HIS CLIENT THAT MAY COME INTO HIS POSSESSION.
Rule 16.01. — A lawyer shall account for all money or property collected or received
for or from the client.
Rule 16.02. — A lawyer shall keep the funds of each client separate and apart from
his own and those of others kept by him.
Rule 16.03. — A lawyer shall deliver the funds and property of his client when due
or upon demand. However, he shall have a lien over the funds and may apply so much
thereof as may be necessary to satisfy his lawful fees and disbursements, giving notice
promptly thereafter to his client. He shall also have a lien to the same extent on all judgments and executions he has secured for his client as provided for in the Rules of Court.
Rule 16.04. — A lawyer shall not borrow money from his client unless the client’s
interests are fully protected by the nature of the case or by independent advice. Neither
shall a lawyer lend money to a client except, when in the interest of justice, he has to
advance necessary expenses in a legal matter he is handling for the client. (Code of Professional Responsibility.)
Art. 1891
OBLIGATIONS OF THE AGENT
465
performed, the resulting profit accrues to the principal as the
legitimate consequence of the relation; if profit accrues from
his violation of duty while executing the agency, that likewise
belongs to the principal, not only because the principal has to
assume the responsibility of the transaction, but also because
the agent cannot be permitted to derive advantage from his own
default. (Dumaguin vs. Reynolds, 92 Phil. 66 [1952].)
It matters not how fair the conduct of the agent may have
been in a particular case, nor that the principal would have been
no better off if the agent had strictly pursued his power, nor that
the principal was not, in fact, injured by the intervention of the
agent for his own profit. The result in both cases is the same.
(Ojinaga vs. Estate of Perez, 9 Phil. 185 [1907].)
EXAMPLES:
(1) P employs A as a full-time salesman. A must turn over
to P any overprice received by him for goods he is to sell at a
certain price. He may not make any profit out of the agency
beyond his stipulated compensation.
(2) In the same example, A also sold goods for B without
the knowledge of P. In this case, P is also entitled to all commissions or compensation earned by A on sales of B’s goods in
violation of the contract of agency.
ILLUSTRATIVE CASES:
1. Real estate broker appropriated money deposited by a
customer and forfeited under a forfeiture clause inserted by the broker
without authority for his own profit.
Facts: P listed his land with A, a real estate broker. A found
a customer, T, and made a contract with him in the name of P
by which T, depositing P10,000.00 with A, agreed to forfeit this
to A if he should not complete the contract. T defaulted.
Issue: Is P entitled to recover the P10,000.00 from A?
Held: Yes. From the facts, it appeared that A inserted
without authority the forfeiture clause for his own profit.
No principle in the law of agency is better settled than that
the agent may not deal in the business of his agency for his
AGENCY
466
Art. 1891
own benefit. All profits and every advantage beyond lawful
compensation made by an agent in the business, or by dealing
or speculating with the effects of the principal though in
violation of his duty as an agent, and though the loss, if one
had occurred, would have fallen on the agent, will, wherever
they can be regarded as the fruit or outgrowth of the agency, be
deemed to have been acquired for the benefit of the principal.
The doctrine is not based on the idea that the transaction
is necessarily an injury to or a fraud upon the principal, but on
the idea of closing the door to temptation to fraud, and keeping
the agent’s eye single to the rights and welfare of his principal.
(Pederson vs. Johnson, 169 Wis. 320, 72 N.W. 723 [1919].)
________
________
________
2. Agent bought for himself mining claims which were
necessary to the operation of other mining claims which were subject
to an option and which principal asked him to investigate.
Facts: A was sent by P to a place to investigate mining
claims which were the subject of an option. He found certain
other claims which were not included in the option, but which
he believed to be essential to the successful operation of those
that were included. In conjunction with T, A purchased right in
the new claims.
A and T were partners in the venture.
Issue: Has P the right to the profits of the transaction and to
the transfer of the claims to him at cost?
Held: Yes. There was a diversion of profits here. A constructive trust is the formula through which the conscience of equity finds expression. It would be against good conscience for
A to retain these profits unless his employer (P) has consented.
When property has been acquired in such circumstances that
the holder of the legal title may not in good conscience retain
the beneficial interest, equity converts him into a (constructive)
trustee.
A different situation would be presented if the claims had
no relation to those which A was under the duty to investigate.
But they had an intimate relation. One could not profitably be
operated without the other. (Beatty vs. Guggenheim Exploration
Co., 225 N.Y. 380, 122 N.E. 378 [1919].)
Art. 1891
OBLIGATIONS OF THE AGENT
467
(2) Secret profit. — It has been held that an agent who takes a
secret profit in the nature of a bonus, gratuity or personal benefit
from the vendee, without revealing the same to his principal,
the vendor, is guilty of breach of his loyalty to the principal and
forfeits his right to collect the commission from his principal,
even if the principal does not suffer any injury by reason of such
breach of fidelity, or that he obtained better results, or that the
agency is a gratuitous one, or that usage or custom allows it;
because the rule is to prevent the possibility of any wrong, not to
remedy or repair an actual damage.
By taking such profit or bonus or gift or propina from the
vendee, the agent thereby assumes a position wholly inconsistent
with that of being an agent for his principal, who has a right to
treat him, insofar as his commission is concerned, as if no agency
existed. The fact that the principal may have been benefited by
the valuable services of the said agent does not exculpate the
agent who has only himself to blame for such a result by reason
of his treachery or perfidy. (Domingo vs. Domingo, 42 SCRA 131
[1971].)
ILLUSTRATIVE CASES:
1. Principal seeks to recover commission paid by him to agent
for receiving secret profit from purchaser.
Facts: P paid A P10,000.00 as the latter’s remuneration for
his services in negotiating the sale of the former’s house. While
acting as P’s agent, A received from B, the purchaser, P2,000.00
as a secret profit. When that was discovered by P, A paid over
that P2,000.00 to P.
Issue: Is P entitled to recover back from A the P10,000.00
retained by him by way of commission?
Held: Yes. (1) Immaterial that principal benefited from services
of agent. — It is claimed by A that he ought not be called upon
to hand over the P10,000.00 to P because P had the benefit of his
services.
The principle of Salomons vs. Pender (3 H. & C. 639 [1885]) is
amply sufficient to govern the case. In that case, it was held that
an agent who was himself interested in a contract to purchase
property of his principal was not entitled to any commission
AGENCY
468
Art. 1891
from the principal. The principle there laid down is that when
a person who purports to act as an agent is not in a position
to say to his principal, “I have been acting as your agent, and
I have done my duty by you,” he is not entitled to recover any
commission from the principal. It is true that the principal has
had the benefit (if it be one) of the agent’s services. But the
principal is in a position to say, “What you have done has been
done as a volunteer and does not come within the line of your
duties as agent.”
(2) Interest of agent adverse to principal. — In matters touching
the agency, agents cannot act so as to bind their principals,
where they have an adverse interest in themselves. The interest
of A here was adverse to that of P. A principal is entitled to have
an honest agent, and it is only the honest agent who is entitled
to any commission. If an agent directly or indirectly colludes
with the other side, and so acts in opposition to the interest of
his principal, he is not entitled to any commission.
(3) Rule same whether commission had been paid or not. —
P allowed A to retain the P10,000.00 in the belief that A had
earned that sum as commission. If the P10,000.00 had not been
received by A, and A had to sue P for the commission, it is
perfectly clear that A could not recover it. A ought not stand
in any better position because P, believing that A had acted
properly, had allowed him to retain the P10,000.00. The case
ought to be the same whether the commission had already
been paid or whether A has to sue for it. (Andrews vs. Ramsay &
Co., 2 K.B. 635 [1903].)
________
________
________
2. Agent bought a house of certain specifications and then sold
it at a profit to principal who asked him to look for such house.
Facts: P asked A, a real estate agent, to look for a house, of
certain specifications. A located such a house, bought it himself
for P500,000.00 and sold it to P for P600,000.00 representing
that he had paid P550,000.00 for it.
Issue: Is P entitled to A’s profits?
Held: Yes. When the relationship of principal and agent
exists, the agent may terminate that relationship by himself
selling to his principal property which belongs to him so long
Art. 1891
OBLIGATIONS OF THE AGENT
as the principal knows that the property does in fact belong
to the agent and that the agent is intending to sell his own
property. But that must be limited to this extent, that it is the
duty of every agent to act honestly and faithfully towards
his principal, and, if he conceals most material facts from his
principal and by means of fraud obtains an advantage for
himself by purporting to sell or by selling property which is his
own, then the duty which lies upon him is not put to an end
by such a contract, and he remains liable to account for any
secret profit which he has made as the result of the transactions
between himself and the principal. (Regier vs. Campbell-Stuart,
Ch. 766 [1939].)
________
________
________
3. Principal seeks to recover secret commission and overprice
received by agent from seller.
Facts: A’s duty as manager of P’s gas works was to
examine tenders of sale of coal and report to P. To induce A to
recommend the acceptance of his tenders, T, a coal merchant,
secretly agreed to pay A a commission. It was also agreed that
the selling price should be raised to P100.00 per ton.
Issue: Is P entitled to recover the commission paid to A and
the extra price received by T?
Held: Yes. (1) Agent committed fraud. — The foundation of
the claim of P against A is that there is a separate and distinct
fraud by A upon him, and, therefore, he is entitled to recover
from A the sum which he has received. Suppose, that T thought
that A was entitled to a commission, T would not be fraudulent,
but A would be, and it is because of his separate and distinct
fraud that he must give up the commission to his principal.
(2) Seller bound to pay extra price received by him. — But this
does not prevent P from suing T also, if he has been fraudulent,
because of the fraud. A has been guilty of two distinct and
independent frauds — the one in his character of agent, the
other by reason of his conspiracy with T with whom he has
dealt. Whether P sues T or A first must be wholly immaterial.
T is bound to pay back the extra price which he had received
and he could not absolve himself or diminish the damages
by reason of P having recovered from A the bribe which he
received. (Mayor, etc. of Salford vs. Lever, 1 Q.B. 168 [1811].)
469
470
AGENCY
Art. 1891
Stipulation exempting agent from
obligation to account void.
The stipulation in paragraph 2 of Article 1891 is contrary to
public policy as it would encourage fraud. It is in the nature of a
waiver of an action for future fraud which is void. (Art. 1171.)
Paragraph 2 of Article 1891 is designed to stress the highest
loyalty that is required of an agent. Article 1891 (and Art.
1909.) imposes upon the agent the absolute obligation to make
a full disclosure or complete account to his principal of all his
transactions and other material facts relevant to the agency,
so much so that the law does not countenance any stipulation
exempting the agent from such obligation and condemns as
void such stipulation. The duty of an agent is likened to that of a
trustee. This is not a technical or arbitrary rule but a rule founded
on the highest and truest principle of morality as well as of the
strictest justice. (Domingo vs. Domingo, supra.)
Liability for conversion.
If the agent fails to deliver and instead converts or appropriates
for his own use the money or property belonging to the principal,
the agent is liable for estafa. (Art. 315, par. 1[b], Revised Penal
Code.) He cannot retain the commission pertaining to him by
subtracting the same from his collections. (U.S. vs. Reyes, 36 Phil.
791 [1917]; see U.S. vs. Kiene, 7 Phil. 736 [1907]; Ojinaga vs. Estate
of Perez, 9 Phil. 185 [1907]; In re Bamberger, 49 Phil. 962 [1927];
Duhart Freres y Cie vs. Macias, 54 Phil. 513 [1930].)
The duty of an agent to account for money or property in his
hands belonging to his principal is similar to that of a trustee in
possession of money or property belonging to the beneficiary of
a trust.
When obligation to account
not applicable.
(1) The duty embodied in Article 1891 will not apply if the
agent or broker acted only as a middleman with the task of merely bringing together the vendor and the vendee, who themselves
Art. 1891
OBLIGATIONS OF THE AGENT
471
thereafter will negotiate on the terms and conditions of the transaction. (Domingo vs. Domingo, 42 SCRA 131 [1971].)
(2) Neither would the rule apply if the agent or broker had
informed the principal of the gift or bonus or profit he received
from the purchaser and his principal did not object thereto. (Ibid.)
(3) Where a right of lien exists in favor of the agent, the rule
is not also applicable.
(a) The agent may, under Article 1914, retain in pledge the
things which are the object of the agency until the principal
effects the reimbursement and pays the indemnity provided
in Articles 1912 and 1913.
(b) A lawyer shall have a lien upon the funds, documents
and papers of his client and may retain the same until his
lawful fees and disbursements have been paid. (Sec. 37, Rule
138, Rules of Court.)
Obligation to turn over proceeds
of agency.
The obligation imposed upon the agent to render an accounting and report of his collections, presupposes the duty of simultaneously turning over his collections.
“Report” imports a statement of collections. “Accounting”
means settling of accounts of administration or agency; delivery
or payment of property funds or money coming into the
hands of the agent; submission of a statement of receipts and
disbursements with the trust funds coming into his hands and
tender or turning over to the one to which he is liable, moneys
and property in respect thereto. The payment is part of the
accounting. (1 Words and Phrases 543.)
The agent must account for the very property or funds he has
received for his principal. (2 C.J. 735-736; Gen. Shipping Co., Inc.
vs. Phil. Surety & Ins. Co., Inc., [C.A.] No. 13294-R, Sept. 30, 1955;
see also U.S. vs. Kiene, 7 Phil. 736 [1907]; Duhart Freres y Cie
vs. Macias, supra.) All profits made and any advantage gained
by an agent in the execution of his agency should belong to the
principal. (Murao vs. People, 462 SCRA 366 [2005].)
472
AGENCY
Art. 1891
Nature of agent’s possession of goods
or proceeds received in agency.
(1) Distinguished from possession of servant or messenger. —
An agent, unlike a servant or messenger, has both the physical
and juridical possession5 of the goods received in agency, or the
proceeds thereof, which take the place of the goods after their
sale by the agent. His duty to turn over the proceeds of the
agency depends upon his discharge as well as the result of the
accounting between him and the principal, and he may not set
up his right of possession as against that of the principal until the
agency is terminated. (Guzman vs. Court of Appeals, 99 Phil. 703
[1956].)
(2) Distinguished from possession of teller of bank. — There is
an essential distinction between the possession by a receiving
teller of funds received from third persons paid to the bank
and an agent who receives the proceeds of sales of merchandise
delivered to him in agency by his principal.
(a) In the former case, payment by third persons to the
teller is payment to the bank itself; the teller is a mere custodian
or keeper of the funds received, and has no independent
right or title to retain or possess the same as against the bank.
An agent, on the other hand, can even assert, as against his
own principal, an independent, autonomous right to retain
the money or goods received in consequence of the agency,
as when the principal fails to reimburse him for advances he
has made, and indemnify for damages suffered without his
fault. (Art. 1914.)
(b) Where a sales agent misappropriates or fails to turn
over to his principal proceeds of things or goods he was
commissioned or authorized to sell for the latter, he is guilty
of estafa. (Art. 315, par. 1[c], Revised Penal Code.) A receiving
5
When money, goods or any other personal property is received by a person from
another in trust, or on commission, or for administration, the former acquires both material or physical possession and juridical possession of the thing received. Juridical possession means a possession which gives the transferee a right over the thing which the
transferee may set up even against the owner. (Chua-Burce vs. Court of Appeals, 331
SCRA 1 [2000]; see Art. 315[1, b], Revised Penal Code.)
Arts. 1892-1893
OBLIGATIONS OF THE AGENT
473
teller of a bank who misappropriates money received by him
for the bank is guilty of qualified theft (Arts. 308, 309[3],
310, Ibid.) on the theory that the possession of the latter is
the possession of the bank he being a mere bank employee.
(Guzman vs. Court of Appeals, 99 Phil. 703 [1956]; ChuaBurce vs. Court of Appeals, 331 SCRA 1 [2000].)
ART. 1892. The agent may appoint a substitute if the
principal has not prohibited him from doing so; but he
shall be responsible for the acts of the substitute:
(1) When he was not given the power to appoint
one;
(2) When he was given such power, but without
designating the person, and the person appointed was
notoriously incompetent or insolvent.
All acts of the substitute appointed against the prohibition of the principal shall be void. (1721)
ART. 1893. In the cases mentioned in Nos. 1 and 2
of the preceding article, the principal may furthermore
bring an action against the substitute with respect to
the obligations which the latter has contracted under
the substitution. (1722a)
Sub-agent defined.
A sub-agent is a person employed or appointed by an agent
as his agent, to assist him in the performance of an act for the
principal which the agent has been empowered to perform.
Power of agent to appoint sub-agent
or substitute.
Unless prohibited by the principal, the agent may appoint a
sub-agent or substitute. The agent in this situation is a principal
with respect to the substitute. The law allows such substitution
for reasons of convenience and practical utility. (11 Manresa 518519.) An agent may not delegate to a subagent where the work
entrusted to him by the principal to carry out requires special
474
AGENCY
Arts. 1892-1893
knowledge, skill, or competence unless he has been authorized
to do so by the principal.
While ordinarily the selection of an agent is determined
largely by the trust and confidence that the principal has in the
agent, the principal need not fear prejudice as he has a right of
action not only against the agent but also against the substitute
with respect to the obligations which the latter has contracted
under the substitution. (Art. 1893.) This right of action against
the substitute is an exception to the general rule that contracts
are binding only between the contracting parties, their assigns
and heirs.6
Relation among the principal, agent,
and sub-agent.
(1) Sub-agent appointed by agent on latter’s sole account. — In
reality, the sub-agent is a stranger to the principal who originally
gave life to the agency. This is particularly true where the subagent has been employed by the agent on the latter’s own account
to assist him in what he has undertaken to do for the principal.
The principal will not be liable to third parties for the sub-agent’s
acts but the agent will be liable to the principal or third parties if
the sub-agent acts wrongfully.
(2) Sub-agent appointed by agent with authority from principal.
— Where, however, the agent is authorized to appoint a subagent, a fiduciary relationship exists between the principal and
the agent, the agent and sub-agent, and the principal and the
sub-agent. Any act done by the substitute or sub-agent in behalf
of the principal is deemed an act of the principal. (11 Manresa
442.) Consequently, neither the agent nor the substitute can be
held personally liable so long as they act within the scope of their
authority. (Macias & Co. vs. Warner, Barnes & Co., 43 Phil. 155
[1922]; Lorca vs. Dineros, 103 Phil. 122 [1958]; Universal Glass
Co., Inc. vs. Barcelona, 3 C.A. Rep. 355; see Art. 1897.)
6
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent. x x x.
Arts. 1892-1893
OBLIGATIONS OF THE AGENT
475
The sub-agent may also be the agent of the principal if he is
in actual control of the business and the principal knows of his
appointment, or knows that his appointment is necessary, and
the agent was not prohibited from employing a sub-agent.
(3) Effect of death of principal/agent. — If the authority of the
sub-agent proceeds from the principal, the death of the agent
who appointed him does not affect his authority. But where the
sub-agent is a substitute for the agent and acts under authority
from him and to whom he is accountable, the death of the agent
terminates his authority even though the power of substitution
is given in the original power. (2 C.J. Sec. 187.)
ILLUSTRATIVE CASE:
Right of a companion or helper of a broker to recover from
property owner his share in the broker’s commission.
Facts: A was authorized by P to negotiate the sale of a
parcel of land. A and S agreed to work together for the sale of
P’s property and were able to find a buyer which accepted P’s
price and terms. P refused to carry out the sale.
As A and S failed to receive their commission, they filed
an action against P, who presented a motion to dismiss the
complaint as to S on the ground that S has no cause of action
against P.
Issue: Has S a sufficient interest in the subject of the action
to justify the joinder of S as a party plaintiff?
Held: Yes. S clearly falls under Section 6, Rule 3 of the Rules
of Court.7 He is entitled to be paid his commission out of the
very contract of agency between A and P, and he acted jointly
in rendering services to P under A’s contract and the same
questions of law and fact govern their claims.
7
Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise
provided in these Rules, join as plaintiffs or be joined as defendants in one complaint,
where any question of law or fact common to all such plaintiffs or to all such defendants
may arise in the action; but the court may make such orders as may be just to prevent any
plaintiff or defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest.
AGENCY
476
Arts. 1892-1893
The rules do not require the existence of a privity of contract
between S and P; all that they demand is that S has a material
interest in the subject of the action, the right to share in the
broker’s commission to be paid A under the latter’s contract,
which right P does not deny. This is sufficient to justify the
joinder of S as a party plaintiff, even in the absence of privity
of contract between him and P. In this case, A acted as a broker,
and as such was entitled to a commission for his services. There
is no law prohibiting A from employing a companion to look
for a buyer; neither is it against public policy. (Marquez vs.
Varela, 92 Phil. 373 [1952].)
Effects of substitution.
(1) Substitution prohibited. — When the substitute is appointed
by the agent against the express prohibition of the principal, the
agent exceeds the limits of his authority. (Art. 1881.) The law says
that all acts of the substitute in such a case shall be void. (Art.
1892, par. 2.) Thus, if the agent is authorized to sell goods of the
principal, the sale made by a substitute designated by the agent
against the prohibition of the principal is void.
If the principal has not prohibited the agent from appointing
a substitute, he will be liable to third persons for the acts of the
sub-agent within the scope of his authority, whether or not such
sub-agent is known to the principal.
(2) Substitution authorized. — If in the contract of agency, the
agent is given the power to appoint a substitute and the principal
did not designate any particular person to be appointed, the substitution has the effect of releasing the agent from his responsibility unless the person appointed is notoriously incompetent or
insolvent (Art. 1892[2].), because this would be an abuse by the
agent of the principal’s confidence. The principal may proceed
against both the agent and the substitute for damages he may
have suffered. But if the substitute is the person designated by
the principal, the consequence is the absolute exemption of the
agent.
(3) Substitution not authorized, but not prohibited. — If the
agent appoints a substitute when he was not given the power to
appoint one (Ibid., No. 1.), the law recognizes the validity of the
Arts. 1892-1893
OBLIGATIONS OF THE AGENT
477
substitution if the same is beneficial to the principal because the
agency has thus been executed in fulfillment of its object.
If the substitution has occasioned damage to the principal, the
agent shall be primarily responsible for the acts of the substitute
(Ibid., par. 1; see Serona vs. Court of Appeals, 392 SCRA 35 [2002];
Escueta vs. Lim, 512 SCRA 411 [2006].) as if he himself executed
them. The principal has also a right of action against the substitute.
(Art. 1893.) It has been held that an attorney who takes a claim
“for collection” without qualification as to his liability is liable
for the defaults of his own clerks and agents, and if he sends the
claim to another attorney for collection, he is generally held liable
for the latter’s defaults. (Mechem, Outlines of Agency [3rd ed.],
Sec. 330, cited in Mechem, Cases on the Law of Agency, p. 414.)
A substitute appointed to collect the deferred installments from
the sale of property made by an attorney-in-fact has no authority
to enter into a new contract with the transferee by modifying
the terms of the sale and releasing the solidary sureties in the
original contract. (Villa vs. Garcia Bosque, 49 Phil. 126 [1920].)
EXAMPLE:
P authorized A to manage P’s business affairs during the
time that P was in the province. A allowed T to manage the
store for him.
(1) Is A responsible for damages caused by the acts of T?
Yes, if T was appointed by A against the prohibition of P that he
shall not entrust the management of the store to another person;
or he was not given the power to appoint one; or he was given
the power, but T is “notoriously incompetent or insolvent.’’
No, if A was given the power and T was not “notoriously
incompetent or insolvent,” or T is the person designated by P
to be appointed as substitute.
(2) Is the substitution valid? No, if A was prohibited by P
from appointing a substitute. Yes, if A was given the power, or
even if he was not given the power, there was no prohibition
imposed by P.
(3) Are the acts of T in the name of P valid? No, if T was
appointed by A against the prohibition of P or T acted beyond
the scope of his authority. (see Art. 1910.)
478
AGENCY
Arts. 1894-1895
ART. 1894. The responsibility of two or more agents,
even though they have been appointed simultaneously,
is not solidary, if solidarity has not been expressly stipulated. (1723)
ART. 1895. If solidarity has been agreed upon, each
of the agents is responsible for the non-fulfillment of
the agency, and for the fault or negligence of his fellow
agents, except in the latter case when the fellow agents
acted beyond the scope of their authority. (n)
Necessity of concurrence where there
are two or more agents.
In American Law, the term joint agents is used in a restricted
sense to mean agents appointed by one or more principals
under such circumstances as to induce the inference that it
was the principal’s intent that all should act in conjunction in
consummating the transaction for which they were appointed.
A distinction is made between a private “joint agency” and a
public “joint agency” (created by law, or essentially public in
character). In the former, the agency cannot be exercised except
by the concurrence of all the agents while in the latter, it may
be exercised by a majority. (Teller, op. cit., citing Caldwell vs.
Harrison, 11 Ala. 755.)
Generally, it is presumed in American law that when a
principal employs more than one agent to represent him in the
same matter of business, they are joint agents as used above. Our
law does not make the same presumption except as to the separate
liability of the agents. A principal, however, may appoint more
than one agent, each one to act separately in a particular branch
of his principal’s business or in a particular locality. Such agents
are called several agents in American law, and are to act separately
and when more than one agent is appointed with reference to the
same business, they are still several agents if it appears that it was
the intention of the principal that they should act separately, and
an execution of the power by one of them is valid and binding on
the principal. (2 C.J. Sec. 317.)
Arts. 1894-1895
OBLIGATIONS OF THE AGENT
479
It is, of course, advisable that when a principal hires several
agents to act for him, that he defines their powers — whether
they may act only as a unit or whether they may act separately.
Nature of liability of two or more
agents to their principal.
(1) In a joint obligation, each debtor is liable only for a proportionate part of the debt. If it is solidary, each debtor is liable
for the entire obligation. (Art. 1216.8) The presumption is that an
obligation is joint. (Arts. 1207, 1208.9) The rule in Article 1894 follows the general principle respecting solidarity.
(2) If solidarity has been agreed upon, each of the agents
becomes solidarily liable:
(a) for the non-fulfillment of the agency even though in
this case, the fellow agents acted beyond the scope of their
authority; and
(b) for the fault or negligence of his fellow agents
provided the latter acted within the scope of their authority.
(Art. 1895.)
The innocent agent has a right later on to recover from the
guilty or negligent agent. (Art. 1217, par. 2.)
(3) An agent who exceeds his powers does not act as such
agent, and, therefore, the principal assumes no liability to third
persons. Since this is so, solidary liability cannot be demanded
by the principal.
8
Art. 1216. The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt
has not been fully collected. (1144a)
9
Art. 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with the
prestations. There is a solidary liability only when the obligation expressly so states, or
when the law or the nature or the obligation requires solidarity. (1137a)
Art. 1208. If from the law, or the nature or the wording of the obligations to which
the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one another, subject to the Rules of Court
governing the multiplicity of suits. (1138a)
AGENCY
480
Art. 1896
EXAMPLE:
A and B were appointed by P to manage the latter’s business.
Is A liable to P for damages in the amount of P10,000.00 caused
by the fault or negligence of B?
(1) The presumption is that their responsibility is joint.
Hence, A is not liable. But if both A and B were at fault, they
shall be liable for P5,000.00 each.
(2) If solidarity has been agreed upon, P may recover
P110,000.00 either from A or B. If A pays P5,000.00, P can still
go against A and B for the balance as long as the entire amount
has not been paid. (see Art. 1216.)
Incidentally, “joint” liability in the common law system is the
equivalent of “solidary” or “several” liability in our jurisdiction.
(see Art. 1915.)
ART. 1896. The agent owes interest on the sums he
has applied to his own use from the day on which he
did so, and on those which he still owes after the extinguishment of the agency. (1724a)
Liability of agent for interest.
Article 1896 contemplates two distinct cases. The first refers
to sums belonging to the principal which the agent applied to his
own use and the second, to sums which the agent still owes the
principal after the expiration of the agency. (Mendezona vs. C.
Viuda de Goitia, 54 Phil. 557 [1930]; A.L. Ammen Transportation
Co. vs. De Margallo, 54 Phil. 570 [1930]; Ojinaga vs. Estate of
Perez, 9 Phil. 185 [1907].)
(1) The agent who converted to his personal use the funds
of the principal is liable for interest by way of compensation or
indemnity (not to be confused with interest for delay) which
shall be computed from the day on which he did so. Of course,
the agent’s liability is without prejudice to a criminal action that
may be brought against him because of the conversion. (Art. 315,
par. 1[b], Revised Penal Code.)
(2) While there is no liability for interest on sums which have
not been converted for the agent’s own use (De Borja vs. De Borja,
Art. 1897
OBLIGATIONS OF THE AGENT
481
58 Phil. 811 [1933].), the agent who is found to owe the principal
sums after the extinguishment of the agency is liable for interest
from the date the agency is extinguished.
Demand not essential for delay
to exist.
Is it always necessary that a demand for payment be made by
the principal in order that delay shall exist? A negative answer
seems evident in view of the clear provisions of the article. (see
Art. 1169[1].) It is clear that if by provision of law the agent is
bound to deliver to the principal whatever he may have received
by virtue of the agency (Art. 1891.), demand is no longer
necessary. (11 Manresa 532.)
ART. 1897. The agent who acts as such is not personally liable to the party with whom he contracts, unless
he expressly binds himself or exceeds the limits of his
authority without giving such party sufficient notice of
his powers. (1725)
Duties and liabilities of agent
to third persons.
The rule is that the principal is responsible for the acts of the
agent done within the scope of his authority and should bear
any damage caused to third persons. (see Art. 1910.) The agent
acquires no rights whatsoever, nor does he incur any liabilities
arising from the contract entered into by him on behalf of his
principal.
(1) In general. — The duties of an agent to third persons and
his corresponding liabilities must be considered with reference
to the character of his act as to whether it is authorized or
unauthorized, and also with reference to the nature of liability
which it sought to assert as being in contract or in tort. The agent
is liable to third persons for his torts which result in an injury to
the third person.
(2) Unauthorized assumption of agency. — One who unauthorizedly assumes to act for another is guilty of a wrong, and is li-
482
AGENCY
Art. 1897
able for the damage to those dealing with him in reliance on his
assumed authority in that they are deprived of the benefit of the
responsibility of the principal. Indeed, the assumed agent, by his
act, impliedly warrants or represents that he has authority, thereby predicating liability for the damage sustained. This implied
warranty and its accompanying liability is not confined merely
to the making of contracts but extends to all unauthorized acts
perpetrated in his assumed agency.
Of course, if no damages have been sustained, no liability for
the agent’s false assumption of authority exists.
(3) Nature of liability. — A purported agent will be held
personally liable as principal on a contract executed without
authority if the contract contains apt words to bind him
personally, or if such was the intention of the parties. However,
in the absence of an apt expression or intention, the nature of his
liability is the subject of some divergence in judicial opinion.
(a) In some jurisdictions, in the absence of statute, the
purported agent is held liable as principal on the contract
itself, based, it has been said, on the theory that since the
contract was intended to bind someone, it must necessarily
bind the purported agent even if the principal is unaffected.
(b) According to the weight of authority, the purported
agent is not liable on the contract itself, for the reason that
there has been no intention to bind the agent, and to hold
that he is bound would, in effect, create a new contract for
the parties. Under the majority rule, liability of the purported
agent, dependent on the facts of the particular case, is
predicated on a breach of an implied warranty or promise of
authority, or in tort for deceit or misrepresentation. Of course,
when governed by statute, the purported agent, according to
its provisions, will be held liable on the contract itself, or for
breach of the implied warranty of authority. (see 3 C.J.S. 115116.)
It has been held that one who signed receipt as a witness
with the word “agent’’ typed below his signature, but never
received the alleged amount or anything on account of the
Art. 1897
OBLIGATIONS OF THE AGENT
483
subject transaction, is not liable. (Caoile vs. Court of Appeals,
226 SCRA 658 [1993].)
(4) Tort cases. — Agency is no defense to action against an
agent based upon commission of tort, his liability being neither
increased nor decreased by the fact of his agency. If the tort is
committed by the agent within the scope of his authority (see
discussion on this matter under Art. 1910.), both the principal
and the agent are liable. It is no defense by the agent that the
benefit obtained by the tort has been turned over to the principal.
(Teller, op. cit., p. 204, citing Boshino vs. Cook, 67 N.J.L. 467.)
(5) Where duty violated owed solely to principal. — An agent is
liable to third persons for injury resulting from his misfeasance or
malfeasance, meaning by these terms, the breach of a duty owed
to third persons generally independent of the particular duties
imposed by his agency. But an agent is generally not responsible
to third persons for injury resulting from nonfeasance, meaning
by that term, the omission of the agent to perform a duty owed
solely to his principal by reason of his agency. (2 C.J.S. 499-500.)
So, if the wrong done by the agent in the performance of
his duties devolves upon him purely from his agency, he is not
responsible for the resulting injury to third persons. Thus, it has
been held that an agent is not liable to a third person for failure
to give his principal notice of facts communicated to him by the
third person. (Reid vs. Humber, 49 Ga. 207.) An agent cannot, as
such, “be subject to any obligations toward third persons other
than those of his principal. Those duties are not imposed upon
him by law. He has agreed with no one except his principal to
perform them. In failing to do so, he wrongs no one but the
principal, who alone can hold him responsible.” (Delaney vs.
Rochereau, 34 La. Ann. 1123, cited in Teller, p. 205.)
When agent may incur personal
liability.
An agent who acts as such within the scope of his authority
represents the principal so that his contract is really the principal’s.
Hence, the agent is not personally liable to the party with whom
he contracts unless he expressly binds himself or he exceeds
484
AGENCY
Art. 1897
the limits of his authority without giving such party sufficient
notice of his powers (see Zialcita-Yuseco vs. Simmons, 97 Phil.
487 [1955]; Banque Generale Belge vs. Walter, Bull & Co., Inc., 84
Phil. 164 [1949]; Salmon & Pacific Commercial Co. vs. Tan Cueco,
36 Phil. 556 [1917]; Salonga vs. Warner, Barnes & Co., Ltd., 88
Phil. 125 [1951]; E. Macias & Co. vs. Warner, Barnes & Co., Ltd.,
43 Phil. 155 [1922].) or by his acts he incurs the liabilities of a
principal under the contract.
A suit against an agent cannot, without compelling reasons,
be considered a suit against the principal. (Philippine National
Bank vs. Ritratto Groups, Inc., 362 SCRA 216 [2001].)
(1) When the agent expressly binds himself, he thereby obligates
himself personally and by his own act. Thus, the agent may be
bound with the third person when the latter, not having faith in
the financial ability of the principal, enters into the contract on
condition that the agent’s financial ability is “back of it.” It has
been held that if the agent, aside from acting on behalf of the
principal, also bound himself to pay the debt, this fact does not
relieve the principal for whose benefit the debt was incurred. The
individual liability of the agent (who mortgaged his property)
can be considered a further security in favor of the creditor and
does not affect or preclude the liability of the principal. Both are
liable. (Tuazon vs. Orosco, 5 Phil. 596 [1905].)
(2) When the agent exceeds his authority, he really acts without
authority and, therefore, the contract is unenforceable against
the principal unless the latter ratifies the act. (Art. 1910, par. 2.)
(a) The agent becomes personally liable because by his
wrong or omission, he deprives the third person with whom
he contracts of any remedy against the principal. The third
person would be defrauded if he would not be allowed to
recover from the agent. (National Power Corp. vs. National
Merchandising Corp., 117 SCRA 789 [1982].) But if the agent
has sufficient notice of his powers to third persons dealing
with him and such persons nevertheless contract with the
agent, neither the principal nor the agent is bound (Art.
1898.), the former, because the contract is unauthorized and
the latter, because he acted in good faith in disclosing the
limits of his powers. (11 Manresa 537.)
Art. 1897
OBLIGATIONS OF THE AGENT
485
(b) The rule that the agent is liable when he acts without
authority is founded upon the supposition that there has been
some wrong or omission on his part either in misrepresenting,
or in affirming, or concealing the authority under which he
assumes to act. Inasmuch as the non-disclosure of the limits
of the agency carries with it the implication that a deception
was perpetuated on the unsuspecting client, the provisions
of Articles 19, 20, and 21 of the Civil Code10 come into play.
(Development Bank of the Phils. vs. Court of Appeals, 231
SCRA 370 [1994].)
(c) That the agent exceeded his authority must be proved
by the principal if he denies liability, or by the third person if
he wants to hold the agent personally liable, on that ground.
Note that in case of excess of authority by the agent, the law
does not say that a third person can recover from both the
principal and the agent. (Eurotech Industrial Technologies,
Inc. vs. Cruzon, 521 SCRA 584 [2007], citing De Leon & De
Leon, Jr., Comments and Cases on Partnership, Agency and
Trusts [1999 edition], p. 512.)
EXAMPLE:
A was given a written power of attorney by P to sell the
latter’s car for P150,000.00. He sold it to B for P130,000.00. The
sale is unenforceable against P but A becomes personally liable
to B.
However, if B was shown the power of attorney by A,
neither P nor A will be liable.
ILLUSTRATIVE CASES:
1.
Third person seeks to recover from both principal and agent.
Facts: P (a foreign juridical entity), through A, entered into
an agreement with B, a domestic company, whereby the latter
10
Art. 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall compensate the latter for the
damage.
AGENCY
486
Art. 1897
undertook to buy copra in the Philippines for P. On account of
the various shipments of copra to foreign countries made by B,
judgment was rendered by the lower court holding P liable to B
for the same. A, as the duly authorized agent of P, was absolved
from any and all liability.
B alleges that A, as agent of P, is liable to it under Article
1897.
Issue: May A (agent) be held personally liable on contracts
made in the name of P (foreign entity) with third persons in the
Philippines?
Held: No. In the case at bar, B cannot recover from both the
principal and its agent. B has been given judgment against P
for the whole amount. It asked for such judgment, and did not
appeal from it.
There is no proof that A, as agent, exceeded the limits of his
authority. In fact, P, who should be the one to raise the point,
never raised it, denied its liability on the ground of excess of
authority. At any rate, Article 1897 does not hold that in case of
excess of authority, both the agent and the principal are liable
to the other contracting party. (Phil. Products Co. vs. Primateria
Societe Anonyme Pour Le Commerce Exterieur: Primateria [Phil.],
Inc., 15 SCRA 301 [1965].)
________
________
________
2. A newly certified collective bargaining agent is being made
liable for damages by company for staging a strike notwithstanding a
no-strike stipulation assumed by a deposed union.
Facts: BB (a workers’ union), for and in behalf of all
employees of BCI (company), entered into a collective
bargaining contract. Three years later, BW was certified by
the court as the sole and exclusive bargaining agent of all
BCI employees. As a result of the strike staged by BW and its
members, BCI sued BW and its President for damages on the
sole premise that the defendants breached their undertaking in
the existing contract with BB not to strike during the effectivity
thereof.
Issue: Is BW contractually bound by the collective
bargaining contract between BB and BCI?
Held: (1) Agent not bound by acts of principal. — No, in the
light of Article 1704 of the Civil Code providing that: “In the
collective bargaining, the labor union or members of the board or
Art. 1897
OBLIGATIONS OF THE AGENT
committee signing the contract shall be liable for non-fulfillment
thereof.” (Stressed for emphasis.) In this case, BW was not a
signatory nor participant in the contract. BCI contends that
since all the employees, as principals, continue being bound
by the no-strike stipulation until the contract’s expiration, BW,
as their agent, must necessarily be bound also pursuant to the
law on agency. This is untenable. Everything binding on a duly
authorized agent acting as such is binding on the principal; not
vice versa, unless there is a mutual agency, or unless the agent
“expressly binds himself” (Art. 1897.) to the party with whom
he contracts.
(2) Previous agent, not new agent, who bound himself to company. — Here, it was the previous agent (BB) who expressly
bound itself to the other (BCI). BW, the new agent, did not assume this undertaking of BB, because when the latter bound
itself and its officers not to strike, it could not bind all the other
rival unions because it was the agent only of the employees,
not of the other unions which possess distinct personalities.
(Benguet Consolidated, Inc. vs. BCI Employees & Workers Union —
PAFLU, 23 SCRA 465 [1968]; see Ortigas vs. Lufthansa German
Airlines, 64 SCRA 610 [1975].)
________
________
________
3. Agent of seller guaranteed to purchaser availability of vessel
to ship quantity of sulfur purchased contrary to seller’s instruction
that sale be subject to availability of vessel.
Facts: NPC and NMC, the latter as representative of P, a
New York firm, executed in Manila a contract for the purchase
by NPC from P of crude sulfur for NPC’s Maria Cristina
Fertilizer Plant in Iligan City. A performance bond was executed
by DIC, an insurance company, in favor of NPC to guarantee
P’s obligations. P was not able to deliver the sulfur due to its
inability to secure shipping space. Under the contract, the
non-availability of a steamer to transport the sulfur was not
a ground for non-payment of the liquidated damages in case
of non-performance by the seller, and NMC even guaranteed
and made itself “responsible for the availability of bottom or
vessel.”
It appeared that before the contract was signed, P advised
NMC that the sale was subject to the availability of a steamer,
and that NMC should not sign the contract unless it wished
to assume full responsibility for the shipment. NMC did not
487
Art. 1897
AGENCY
488
disclose the cable to NPC when it finalized the contract. P
disclaimed responsibility for the contract.
NPC sued P, NMC, and DIC for the recovery of liquidated
damages. The case against P was dismissed by the trial court
for lack of jurisdiction because it was not doing business in
the Philippines. DIC contended that it was not liable to NDC
because its bond was posted, not for NMC, but for P, which
was not liable on the contract of sale.
Issue: Are NMC and DIC liable to NPC for the recovery of
the stipulated liquidated damages?
Held: (1) Agent who exceeded his authority personally liable. —
Yes. NMC is liable for damages because under Article 1897, the
agent who exceeds the limits of his authority without giving
the party with whom he contracts sufficient notice of his
powers is personally liable to such party. The rule that every
person dealing with an agent is put upon an inquiry and must
discover upon his peril the authority of the agent, applies if
the principal is sought to be held liable on the contract entered
into by the agent, but not in this case where it is the agent that
is “sought to be held liable on a contract of sale which was
expressly repudiated by the principal because the agent took
chances, it exceeded its authority, and, in effect, it acted in its
own name.”
(2) Surety liable on its performance bond. — The contention
of DIC cannot be sustained. The rule is that “want of authority
of the person who executes an obligation as the agent or
representative of the principal will not, as a general rule, affect
the surety’s liability thereon, especially in the absence of fraud,
even though the obligation is not binding on the principal.”
(72 C.J.S. 525.) In this case, it was NMC that actually solicited
the bond from DIC and NMC is being held liable under the
contract of sale because it virtually acted in its own name.
It became the principal in the performance bond. In the last
analysis, DIC acted as surety for NMC. (National Power Corp. vs.
National Merchandising Corp., 117 SCRA 789 [1982].)
________
________
________
4. A parking lot attendant contracted for the safekeeping of
personal property left in a parked car by a customer.
Facts: A, a parking lot attendant employed by P, contracted
for the safekeeping of a travelling bag left in a parked car by T.
Art. 1897
OBLIGATIONS OF THE AGENT
489
There is no fact or circumstance tending to limit A’s authority
other than the nature of the business which he was conducting
in the name of P.
Issue: Is it reasonable to infer that A was at least authorized
to make known to a customer whether a bag of this kind might
be left in the automobile?
Held: Yes. The evidence disclosed that A was in charge of
the business on the premises. His authority would seem to be
necessarily inferred from the fact that he was left in charge of
this business. (Mulhern vs. Public Auto Parks, Inc., 16 N.E. [2d]
157 [1938].)
(3) When an agent by his act prevents performance on the part
of the principal, he can be held liable to third persons. It is true
that an agent who acts for a revealed principal in the making
of a contract does not become personally bound to the other
party in the sense than an action can ordinarily be maintained
upon such contract directly against the agent. Yet it is manifest
upon the simplest principles of jurisprudence that one who has
intervened in the making of a contract in the character of agent
cannot be permitted to intercept and appropriate the thing which
the principal is bound to deliver, and thereby make performance
by the principal impossible.
The agent in any event must be precluded from doing any
positive act that could prevent performance on the part of his
principal. This much, ordinary good faith towards the other
contracting party requires. (National Bank vs. Welch, Fairchild &
Co., 48 Phil. 780 [1926].)
(4) When a person acts as an agent without authority or without
a principal, he is himself regarded as a principal, possessed of all
the rights and subject to all the liabilities of a principal. (Vda.
de Salvatierra vs. Garlitos, 103 Phil. 757 [1958]; Bay View Hotel,
Inc. vs. Lynn Romero Productions, [Phils.], Inc., 7 C.A. Rep. 38.)
Contracts are binding only between the parties thereto, and it
is the consent manifested to the other that binds, not one’s
undisclosed, and in that sense, secret intention (to act in the
name of the principal). (Connell Bros. Company [Phils.] vs. Hart,
1 C.A. Rep. 529.)
490
AGENCY
Art. 1898
A person who contracts as the representative of a non-existent
principal (e.g., a proposed corporation or an unincorporated
association) is the real party to the contract. (Albert vs. University
Publishing Co., 13 SCRA 84 [1965].)
(5) A person who purports to act as agent of an incapacitated
principal also incurs personal liability unless the third party was
aware of the incapacity at the time of making the contract.
Third party’s liabilities toward
agent.
A third party’s liability on agent’s contracts is to the principal,
not to the agent, because such contracts are not his own but
his principal’s. There are few instances in which a third party
subjects himself to liability at the hands of an agent. The four
main instances are these:
(1) Where the agent contracts in his own name for an
undisclosed principal (see Art. 1883.), in which case, the agent
may sue the third party to enforce the contract;
(2) Where the agent possesses a beneficial interest in the
subject matter of the agency. A factor selling under a del credere
commission (see Art. 1907.) would illustrate such an agent, as
would also an auctioneer by virtue of his lien (see Art. 1914.);
(3) Where the agent pays money of his principal to a third
party by mistake or under a contract which proves subsequently
to be illegal, the agent being ignorant with respect to its illegal
nature; and
(4) Where the third party commits a tort against the agent. We
have seen that an agent may not utilize his agency as a defense
to an action based on a tort committed by him. The converse is
also true: an agent may sue for a tort committed against him,
even though the alleged tortious act is also a wrong against the
principal. (Teller, op. cit., pp. 206-207.)
ART. 1898. If the agent contracts in the name of the
principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void
Art. 1898
OBLIGATIONS OF THE AGENT
491
if the party with whom the agent contracted is aware
of the limits of the powers granted by the principal. In
this case, however, the agent is liable if he undertook to
secure the principal’s ratification. (n)
Effect where third person aware of limits
of agent’s powers.
(1) If the agent acts in the name of the principal (Art. 1883,
par. 1.) and within the scope of his authority (Art. 1881.), the agent
assumes no liability. The effect of the representation is to bind the
principal as though he personally entered into the contract.
(2) If the agent acts in excess of his authority, even if he
contracts in the name of the principal, the agent is the one
personally liable unless there is subsequent ratification by the
principal. (Art. 1910, par. 2.) The rule that a contract entered into
by one who has acted beyond his powers shall be unenforceable
(see Arts. 1317, par. 2; 1403[1].) refers to the unenforceability of
the contract against the principal, and does not apply where the
action is against the agent himself for contracting in excess of
the limits of his authority. (National Power Corp. vs. National
Merchandising Corp., 117 SCRA 789 [1982].)
(3) The liability of an agent who exceeds the scope of his
authority depends upon whether the third person is aware of the
limits of the agent’s power. (Development Bank of the Phils. vs.
Court of Appeals, 231 SCRA 370 [1994].) The agent is not bound
nor liable for damages in case he gave notice of his powers to
the person with whom he has contracted (Art. 1897.) nor in case
such person is aware of the limits of the powers granted by the
principal. (Art. 1898.) The effect is to make the contract, which is
unenforceable as against the principal, void even as between the
agent and the third person, and consequently, not legally binding
as between them. However, if the agent promised or undertook
to secure the principal’s ratification and failed, he is personally
liable. If the ratification is obtained, then the principal becomes
liable. (Cervantes vs. Court of Appeals, 304 SCRA 25 [1999]; Safic
Alcan & Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA 559
[2001].)
AGENCY
492
Art. 1898
EXAMPLE:
If B, in the preceding example, knew that A was not
authorized to sell P’s car for P130,000.00, the sale is void even
as between A and B. However, if B bought the car on the
assurance of A that he would obtain the consent of P, A would
be liable in case of failure to obtain such ratification.
If P’s consent is subsequently given, then there is ratification
and the sale will be binding on P. (see Art. 1901.)
ILLUSTRATIVE CASE:
Consignee seeks to recover damages for loss of goods against
agent of insurance company.
Facts: A contract of marine insurance was made and
executed by and between WF Insurance Company of New
York and A, the sender of goods consigned to B. The contract
was entered into in New York. According to the contract, WF
undertook to pay to A or B, the consignee, the damages that
may be caused to the goods shipped.
B instituted an action against WBC, the agent of WF in the
Philippines, for the loss or damage to the goods shipped.
Issue: Is WBC, as agent of WF, responsible upon the insurance claim subject of the suit?
Held: No. WBC has not taken part, directly or indirectly, in
the contract in question. It did not enter into any contract either
with A or B. There is nothing in the contract which may affect
WBC favorably or adversely, the fulfillment of which may be
demanded by or against it. (see Art. 1311.) That contract is
purely bilateral, binding only upon A, the consignor, and WF,
the insurance company.
The scope and extent of the functions of an adjustment and
settlement agent, as in the case of WBC, do not include personal
liability. His functions are merely to settle and adjust claims
in behalf of his principal. If those claims are disapproved by
the principal, the agent does not assume any personal liability.
The recourse of the insured is to press his claim against the
principal. (Salonga vs. Warner, Barnes & Co., Ltd., 88 Phil. 127
[1951]; see E. Macias & Co. vs. Warner, Barnes & Co., 43 Phil.
155 [1922].)
Arts. 1899-1900
OBLIGATIONS OF THE AGENT
493
ART. 1899. If a duly authorized agent acts in accordance with the orders of the principal, the latter cannot
set up the ignorance of the agent as to circumstances
whereof he himself was, or ought to have been, aware.
(n)
Effect of ignorance of agent.
This article refers to the liability of the principal towards
third persons.
It is enough that the agent acts within the scope of his
authority (Art. 1881.) and in accordance with the instructions
of the principal. (Art. 1887.) If the principal appoints an agent
who is ignorant, the fault is his alone. Equity demands that the
principal should be bound by the acts of his agent.
ART. 1900. So far as third persons are concerned, an
act is deemed to have been performed within the scope
of the agent’s authority, if such act is within the terms of
the power of attorney, as written, even if the agent has
in fact exceeded the limits of his authority according to
an understanding between the principal and the agent.
(n)
Scope of agent’s authority
as to third persons.
Scope of agent’s authority includes not only the actual authorization conferred upon the agent by his principal, but also that
which has apparently or impliedly been delegated to him. (Angerosa vs. The White Company, 210 N.Y.S. 204 [1936].)
(1) Where authority not in writing. — Every person dealing
with an assumed agent is put upon an inquiry and must discover
upon his peril, if he would hold the principal liable, not only
the fact of the agency but the nature and extent of authority of
the agent. (Veloso vs. La Urbana, 58 Phil. 681 [1933]; Strong vs.
Gutierrez Repide, 6 Phil. 680 [1906]; Deen vs. Pacific Commercial
Co., 42 Phil. 738 [1922]; Toyota Shaw, Inc. vs. Court of Appeals,
244 SCRA 320 [1995].) If he does not make such an inquiry, he
is chargeable with knowledge of the agent’s authority, and his
494
AGENCY
Art. 1900
ignorance of that authority will not be an excuse. (Bacaltos Coal
Mines vs. Court of Appeals, 245 SCRA 460 [1995].)
(a) He must act with ordinary prudence and reasonable diligence to ascertain whether the agent is acting and
dealing with him within the scope of his powers. Obviously,
if he knows or has good reason to believe that the agent is
exceeding his authority, he cannot claim protection. So, if
the character assumed by the agent is of such a suspicious
or unreasonable nature, or if the authority which he seeks is
of such an unusual or improbable character, as would suffice
to put an ordinarily prudent man upon his guard, the party
dealing with him may not shut his eyes to the real state of
the case but should withal refuse to deal with the agent at all,
or should ascertain from the principal the true condition of
affairs. (Harry E. Keeler Electric Co. vs. Rodriguez, 44 Phil. 19
[1922].)
(b) The fact that one is dealing with an agent, whether
the agency be general or special, should be a danger signal.
The mere representation or declaration of one that he is
authorized to act on behalf of another cannot of itself serve
as proof of his authority to act as agent or of the extent of his
authority as agent. (Roman Catholic Archbishop of Manila
vs. Hallare, C.A.-G.R. No. 29035-R, Dec. 10, 1963; Yu Eng Cho
vs. Pan American World Airways, Inc., 328 SCRA 717 [2000].)
(c) The mere opinion of an agent as to the extent of
his powers will not bind the principal who may act on the
presumption that third persons dealing with his agent will
not be negligent to ascertain the extent of his authority as
well as the existence of the agency. (3 Am. Jur. 2d 482-483.)
The authority or extent of authority of an agent cannot be
established by his own representations out of court but upon
the basis of the manifestations of the principal himself. In case
the fact of agency or the extent of the authority of the agent
is controverted, the burden of proof is upon the third person to
establish it. (Ibid., BA-Finance Corp. vs. Court of Appeals, 211
SCRA 112 [1992]; Velasco vs. La Urbana, 58 Phil. 681 [1933];
Bacaltos Coal Mines vs. Court of Appeals, supra; Safic Alcan
& Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA 559
Art. 1900
OBLIGATIONS OF THE AGENT
495
[2001].) In the absence of proof, he cannot seek relief on the
basis of a supposed agency. The law makes no presumption
with respect to an agent’s authority.
ILLUSTRATIVE CASE:
Purchaser paid purchase price to agent who was given mere
authority to sell property.
Facts: P, engaged in the sale of electric plants, agreed to
give A 10% commission for his services for any plant A could
sell. Through the efforts of A, P sold a plant to B. Without the
knowledge of P, B paid the purchase price to A.
Issue: Is the payment to A binding upon P?
Held: No. In approaching the consideration of the inquiry
whether an assumed authority exists in a given case, there are
certain fundamental principles which must not be overlooked.
Among them are:
(1) that the law indulges in no bare presumptions that an
agency exists; it must be proved and presumed from facts;
(2) that the agent cannot establish his own authority, either
by his representations or by assuming to exercise it;
(3) that an authority cannot be established by a mere
rumor or general reputation;
(4) that even a general authority is not an unlimited one;
and
(5) that every authority must find its ultimate source
in some act or omission of the principal. An assumption of
authority to act as agent for another of itself challenges inquiry.
Like a railroad crossing, it should be in itself a sign of
danger and suggest the duty to stop, look, and listen! (citing
Mechem, Vol. 1, Sec. 746.)
In the case at bar, P never authorized A to receive or receipt
for money in his behalf. Applying the above rules, B had no
right to assume by any act or deed of P that A was authorized
to receive payment. A made the payment at his own risk and
on the sole representation of A that he was authorized to accept
the payment. (Harry E. Keeler Electric Co. vs. Rodriguez, 44 Phil.
19 [1922].)
AGENCY
496
Art. 1900
(2) Where authority in writing. — Nevertheless, if the authority
of the agent is in writing, such person is not required to inquire
further than the terms of the written power of attorney. As far as
he is concerned, an act of the agent within the terms of the power
of attorney as written is within the scope of the agent’s authority,
although the agent has in fact exceeded the limits of his actual
authority according to the secret understanding between him and
the principal. (see Arts. 1887, 1902.) In such a case, the principal
is estopped from claiming that the agent exceeded his authority.
The rule is necessary to protect the interests of third persons.
EXAMPLE:
P gave A a written power of attorney wherein A is authorized to sell P’s factory for such price and upon such terms and
conditions as A may deem reasonable. However, P and A had
an understanding to the effect that A should sell the factory for
not less than P5 million and for cash. A sold the factory to B on
credit for P4,500,000.00.
Under Article 1900, P is bound. As far as B is concerned, A
acted within the scope of his authority. Here, A has the power
to make the sale binding on P even though as between them, A
has no authority to make such sale.11
ILLUSTRATIVE CASES:
1. Husband, with authority to mortgage from wife, mortgaged
her property to secure his pre-existing debt.
Facts: W (wife) gave H (husband) a written power of
attorney “to loan and borrow money and to mortgage her
property.” H signed W’s name to a promissory note which
would make her liable for the payment of the pre-existing debt
of H or that of his firm, for which W was not previously liable,
mortgaging her property to secure said debt.
Issue: Is the mortgage binding upon W?
Held: No. H acted outside the scope of his authority. (See
Art. 1881.) The powers and duties of H as agent of W are
confined and limited to those which are specified and defined
his written power of attorney, which limitation is a notice to,
11
See Distinctions between “authority’’ and “power’’ under Articles 1881 and 1882.
Art. 1900
OBLIGATIONS OF THE AGENT
and is binding upon, the person dealing with such agent. (Bank
of the P.I. vs. De Coster, 47 Phil. 594 [1925].)
________
________
________
2. Payments evidenced by provisional receipts, made by a
customer to the manufacturer’s sales representative, were not turned
over to the manufacturer.
Facts: On several occasions, T, a dealer of soft drinks,
purchased and received on credit various products from P, a
manufacturer of soft drinks and beverages. T paid A, P’s route
manager, on four (4) occasions, sums of money for which T
received four (4) trade provisional receipts (TPRs) issued by A.
These receipts are given by P to its sales representatives who,
in turn, gave a copy thereof to customers when a collection is
made.
P claimed that it never received the amounts reflected in
the provisional receipts but it failed to prove that A, who is its
duly authorized agent with respect to T, did not receive these
amounts from the latter.
Issue: Should the amounts in the said receipts be credited in
favor of T?
Held: Yes. Under Article 1900, insofar as P’s customers
are concerned, for as long as they paid their obligations to
the sales representative of P using the latter’s official receipts,
said payment extinguishes their obligations; otherwise, it
would unreasonably cast the burden of supervision over P’s
employees from P to its customers. The substantive law is
that payment shall be made to the person in whose favor the
obligation has been constituted or his successor-in-interest
or any person authorized to receive it. (Art. 1240.) It was the
responsibility of T to turn over the collection to P. (Eugenio vs.
Court of Appeals, 239 SCRA 207 [1994].)
________
________
________
3. Agent given authority “to use the coal operating contract’’
of his principal, entered into a trip charter party contract in behalf of
the latter.
Facts: Petitioner GAB signed an authorization in favor of
RRS the pertinent portions of which read as follows:
“I, German A. Bacaltos, of legal age, Filipino, widower,
and residing at second street, Espina Village, Cebu City,
497
498
AGENCY
Art. 1900
province of Cebu, Philippines, do hereby authorize Rene
R. Savellon, of legal age, Filipino and residing at 376-R
Osmeña Blvd., Cebu City, Province of Cebu, Philippines,
to use the coal operating contract of Bacaltos Coal Mines
of which I am the proprietor, for any legitimate purpose
that it may serve. Namely, but not by way of limitation, as
follows:
(1) To acquire purchase orders for and in behalf of
Bacaltos Coal Mines;
(2) To engage in trading under the style of Bacaltos
Coal Mines/Rene Savellon;
(3) To collect all receivables due or in arrears from
people or companies having dealings under Bacaltos Coal
Mines/Rene Savellon;
(4) To extend to any person or company by
substitution the same extent of authority that is granted to
Rene Savellon;
(5) In connection with the preceding paragraphs to
execute and sign documents, contracts, and other pertinent
papers.
Further, I hereby give and grant to Rene Savellon
full authority to do and perform all and every lawful act
requisite or necessary to carry into effect the foregoing
stipulations as fully to all intents and purposes as I might
or would lawfully do if personally present, with full power
of substitution and revocation.’’
A trip charter party was executed by and between Bacaltos Coal Mines (BMC) represented by RRS and private
respondent SM Corporation (SMC) whereby for a consideration “lets, demises’’ BMC’s vessel to charterer SMC “for
three round trips to Davao.’’ SMC filed a complaint against
BMC, GAB, and RRS for specific performance and damages.
Issue: The paramount issue raised is whether RRS was duly
authorized by petitioners BMC and GAB to enter into the trip
charter party under and by virtue of the authorization.
Held: No such authority was given to RRS.
(1) Duty of every person dealing with an agent. — “Every
person dealing with an agent is put upon inquiry and must
Art. 1900
OBLIGATIONS OF THE AGENT
discover upon his peril the authority of the agent. If he does
not make such inquiry, he is chargeable with knowledge of the
agent’s authority, and his ignorance of that authority will not
be an excuse. Persons dealing with an assumed agent, whether
the assumed agency be a general or special one, are bound at
their peril, if they would hold the principal, to ascertain not
only the fact of the agency but also the nature and extent of
the authority, and in case either is controverted, the burden of
proof is upon them to establish it.’’
(2) Extent and scope of RRS’s powers. — “Since the agency
of Savellon is based on a written document, the Authorization
of 1 March 1988, the extent and scope of his powers must
be determined on the basis thereof. The language of the
Authorization is clear. x x x There is only one express power
granted to Savellon, viz., to use the coal operating contract for
any legitimate purpose it may serve. The enumerated “five
prerogatives’’ — to employ the term used by the Court of
Appeals — are nothing but the specific prerogative subsumed
under or classified as part of or as examples of the power to
use the coal operating contract. The clause “but not by way of
limitation’’ which precedes the enumeration could only refer
to or contemplate other prerogatives which must exclusively
pertain or relate or be germane to the power to use the coal
operating contract.
The conclusion then of the Court of Appeals that the
Authorization includes the power to enter into the Trip Charter
Party because the “five prerogatives’’ are prefaced by such
clause, is seriously flawed. It fails to note that the broadest
scope of Savellon’s authority is limited to the use of the coal
operating contract and the clause cannot contemplate any other
power not included in the enumeration or which are unrelated
either to the power to use the coal operating contract or to
those already enumerated. In short, while the clause allows
some room for flexibility, it can comprehend only additional
prerogatives falling within the primary power and within the
same class as those enumerated.
The trial court, however, went further by hastily making
a sweeping conclusion that “a company such as a coal mining
company is not prohibited to engage in entering into a Trip
Charter Party contract.’’ But what the trial court failed to
consider was that there is no evidence at all that Bacaltos Coal
499
500
AGENCY
Art. 1900
Mines as a coal mining company owns and operates vessels,
and even if it owned any such vessels, that it was allowed to
charter or lease them.’’
(3) Authorization, a special power of attorney. — “The trial
court also failed to note that the Authorization is not a general
power of attorney. It is a special power of attorney for it refers to
a clear mandate specifically authorizing the performance of a
specific power and of express acts subsumed therein. In short,
both courts below unreasonably expanded the express terms
of or otherwise gave unrestricted meaning to a clause which
was precisely intended to prevent unwarranted and unlimited
expansion of the powers entrusted to Savellon.’’
(4) SMC failed to exercise due diligence and prudence. — “The
suggestion of the Court of Appeals that there is obscurity in
the Authorization which must be construed against German
Bacaltos because he prepared the Authorization has no leg to
stand on inasmuch as there is no obscurity or ambiguity in the
instrument. If any obscurity or ambiguity indeed existed, then
there will be more reason to place SMC on guard and for it to
exercise due diligence in seeking clarification or enlightenment
thereon, for that was part of its duty to discover upon its peril the
nature and extent of Savellon’s written agency. Unfortunately,
it did not.
Howsoever viewed, the foregoing conclusions of the Court
of Appeals and the trial court are tenuous and farfetched,
bringing to unreasonable limits the clear parameters of the
powers granted in the Authorization.
Furthermore, had SMC exercised due diligence and
prudence, it should have known in no time that there is
absolutely nothing on the face of the Authorization that confers
upon Savellon the authority to enter into any Trip Charter
Party. Its conclusion to the contrary is based solely on the second
prerogative under the Authorization, to wit:
To engage in trading under the style of Bacaltos Coal
Mines/Rene Savellon; unmindful that such is but a part of the
primary authority to use the coal operating contract which it did
not even require Savellon to produce. x x x Since the principal
subject of the Authorization is the coal operating contract, SMC
should have required its presentation to determine what it is
and how it may be used by Savellon. Such a determination
Art. 1900
OBLIGATIONS OF THE AGENT
is indispensable to an inquiry into the extent or scope of his
authority. x x x SMC’s negligence was further compounded
by its failure to verify if Bacaltos Coal Mines owned a vessel.
A party desiring to charter a vessel must satisfy itself that the
other party is the owner of the vessel or is at least entitled to
its possession with power to lease or charter the vessel. In the
instant case, SMC made no such attempt. It merely satisfied
itself with the claim of Savellon that the vessel it was leasing is
owned by Bacaltos Coal Mines and relied on the presentation
of the Authorization as well as its test on the seaworthiness of
the vessel. x x x.
The Authorization itself does not state that Bacaltos Coal
Mines owns any vessel, and since it is clear therefrom that it is
not engaged in shipping but in coal mining or in coal business,
SMC should have required the presentation of pertinent
documentary proof of ownership of the vessel to be chartered.’’
(5) SMC made possible the wrong to be done. — “There is
likewise no proof that the petitioners received the consideration
of the Trip Charter Party. The petitioners denied having received
it. The evidence for SMC established beyond doubt that it was
Savellon who requested in writing on 19 October 1988 that the
check in payment therefor be drawn in favor of Bacaltos Coal
Mines/Rene Savellon and that SMC drew the check in favor of
Rene Savellon in Trust for Bacaltos Coal Mines and delivered
it to Savellon who thereupon issued a receipt. We agree with
the petitioners that SMC committed negligence in drawing
the check in the manner aforestated. It even disregarded the
request of Savellon that it be drawn in favor of Bacaltos Coal
Mines/Rene Savellon.
Furthermore, assuming that the transaction was permitted
in the Authorization, the check should still have been drawn in
favor of the principal. SMC then made possible the wrong done.
There is an equitable maxim that between two innocent parties,
the one who made it possible for the wrong to be done should
be the one to bear the resulting loss. For this rule to apply, the
condition precedent is that both parties must be innocent. In
the present case, however, SMC is guilty of not ascertaining the
extent and limits of the authority of Savellon. In not doing so,
SMC dealt with Savellon at its own peril.’’ (Bacaltos Coal Mines
vs. Court of Appeals, 245 SCRA 460 [1995].)
501
502
AGENCY
Art. 1900
Methods of broadening and restricting
agent’s authority.
A principal may assume rights and incur liabilities in respect
of his agent’s acts or transactions other than those for which
express authorization has been given and an agent’s authority
may be enlarged or restricted in a number of ways:
(1) By implication. — This means that the agent’s authority
extends not only to the express requests, but also to those acts
and transactions incidental thereto. It embraces all the necessary
and appropriate means to accomplish the desired end.
This principle is founded on the manifest intention of the party
creating such authority and is in furtherance of such intention.
Thus, the employment of a general manager of a business
constitutes an implied authorization to him to hire employees;
the authorization to drive a motor vehicle incidentally empowers
the agent to purchase gas and all necessary things to make a trip;
the authority to receive payment empowers the agent, upon
receiving payment, to surrender to the payee the evidence of the
debt; etc.
(2) By usage and custom. — They may enlarge as well as
restrict the scope of the agent’s authority.
(a) An agent’s authorization may not, however, be
enlarged through usage and custom in the following four
classes of cases:
1) Where it is sought to vary the terms of an express
authorization, as where the agent appointed to sell for
cash only, seeks to allege a custom to sell for credit;
2) Where it is sought thereby to dispense with a legal
requirement enacted for the principal’s benefit (as, for
example, the legal provision [Art. 2112.] that the pledgee
may appropriate the thing pledged only if after the first
and second public auctions, the thing is not sold);
3) Where it is sought thereby to change a rule of law
(as, for example, a law makes illegal certain contracts)
or to dispense with a formality required by law (as, for
example, the Statute of Frauds [Art. 1403[2].); and
Art. 1900
OBLIGATIONS OF THE AGENT
503
4) Where it is sought to vary an essential quality of
the agency relationship, as where a broker acting under
an authority to sell stock, purchased principal’s stock
for himself, and then introduces a custom in the market,
empowering him to do so;
(b) The general rule requires that the principal must
have notice of the alleged custom before the agent’s acts, in
accordance therewith, may bind the principal. But in two
main types of cases, a principal is deemed to have notice of a
given usage, even though he did not in fact have such notice:
1) Where the principal and the agent reside in the
same community, the usage is definite and well-known,
and the agent has no notice that he is to act to the contrary;
and
2) Where the agent is authorized to deal in a particular
place or in a particular market or exchange. This is upon
the ground that the principal, as a reasonable man, must
have anticipated that such usages were likely to prevail
and, therefore, in the absence of any contrary intention,
must have authorized the dealing in contemplation of
them.
(3) By necessity. — Actually, an agency can never be created
by necessity; what is created is additional authority in an agent
appointed and authorized before the emergency arose. The
existence of an emergency or other unusual conditions may
operate to invest in an agent authority to meet the emergency,
provided:
(a) the emergency really exists;
(b) the agent is unable to communicate with the principal;
(c) the agent’s enlarged authority is exercised for the
principal’s protection; and
(d) the means adopted are reasonable under the circumstances. Thus, a conductor may employ a physician upon the
railroad’s credit to care for a brakeman injured in an accident.
In an ordinary case, the person employed in an emergency
is an agent (not a sub-agent) because the appointing agent
504
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Art. 1900
is not employed to do that for which the appointed agent is
responsible.
(4) By certain doctrines. — The doctrines (a) of apparent
authority (see Art. 1911.), (b) of liability by estoppel (Ibid.; see Art.
1873.), and (c) of ratification (Art. 1910.) are additional methods
by which authorization may be created.
(5) By the rule of ejusdem generis. — An outstanding maxim
of construction which operates to restrict the agent’s authority
is the rule which is usually expressed in the Latin words ejusdem
generis (literally, “of the same kind or species”). The term is a
method for stating the rule that where, in an instrument of any
kind, an enumeration of specific matters is followed by a general
phrase, the general phrase is held to be limited in scope by the
specific matters. (see Teller, op. cit., pp. 60-80.)
Responsibility of principal where agent
acted with improper motives.
(1) General rule. — The motive of the agent in entering into
a contract with a third person is immaterial. Where a written
authority given to an agent covers the thing done by him on
behalf of the principal, it is not competent to the court to look
into the mind of the agent, and if he had applied his authority for
his own ends, to hold that the principal is not bound.
It would be impossible for the business of a mercantile
community to be carried on, if a person dealing with an agent
was bound to go behind the authority of the agent in each
case, and inquire whether his motives did or did not involve
the application of the authority for his own private purposes.
Furthermore, any inquiry of that kind would be regarded by an
agent as an affront. (Hambro vs. Burmand, 2 K.B. 10, 17 Harvard
L.R. 56.)
(2) Exceptions. — The rule does not apply:
(a) where the third person knew that the agent was
acting for his private benefit. In other words, the principal is
not liable to the third person.
Art. 1900
OBLIGATIONS OF THE AGENT
505
ILLUSTRATIVE CASE:
Agent, in payment of his debt, gave a check drawn on principal’s
account and as principal’s agent.
Facts: A, who had authority to draw checks on P’s account
on P’s affairs, bought a car for his own use from T, giving in
payment a check drawn on P’s account and signed by himself
as agent.
Issue: Is P entitled to recover from T the money paid?
Held: Yes. To sign and deliver checks in payment of his debts
was not within the authority of A as agent acting in the affairs
of P, and T had notice by the check itself that A was dealing for
his own private benefit with the money of his principal. (Reckitt
vs. Barnett, Pembroke & Slatter, Ltd., 77 Pa. L.R. 271.)
(b) where the owner is seeking recovery of personal
property of which he has been unlawfully deprived. (Art.
559;12 see Dizon vs. Suntay, 47 SCRA 160 [1972].) Thus, where
an agent entrusted with a diamond ring for sale to a named
party, had in fact a preconceived design to steal it and convert
the proceeds, and did in fact pledge it for his own debt, the
principal is entitled to recover the ring.
It is not sufficient to work an estoppel that the person to
whose possession the owner entrusts his chattel is a dealer
in similar merchandise. If the doctrine were otherwise, “no
man could safely leave his watch with a watch maker who
sells watches” or “his car in a garage, where the business of
selling cars is conducted,” for the purpose of having the same
repaired. Neither is it sufficient, to make out an estoppel, that
the possessor of the chattel is authorized to exhibit the same
for the purpose of obtaining offers of purchase provided he
can show that while authority was given to exhibit the chattel
12
Art. 559. The possession of movable property acquired in good faith is equivalent
to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived
thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return
without reimbursing the price paid therefor. (464a)
506
AGENCY
Art. 1900
for sale, no authority to sell, without first reporting to the
owner, was conferred. (Utica Trust & Deposit Co. vs. Decker,
244 N.Y. 340, 155 N.E. 665.)
Contra:13 “Where a mortgagor is a retail merchant
engaged in selling articles or merchandise of the same kind
as the mortgaged property and the mortgagee permits the
mortgagor to keep the mortgaged property in his salesroom,
among such other articles constituting his stock in trade,
which he is selling in the regular course of trade, in such
case, even though the permission is coupled with the proviso
that the mortgaged property may be used for purposes of
demonstration only, one who purchases the mortgaged
property in the regular course of trade in good faith obtains
good title unencumbered by the mortgage.
If the law were otherwise, no one would dare purchase at
the merchant’s retail store a fur coat, a suit of clothes, a piano,
a radio set, or any other article of merchandise, without first
searching the records in the office of the country clerk and
recorder. x x x Where one of two innocent persons must
suffer loss because of the fraudulent act of a third person, the
law places the loss upon the one who put it in the power of
the third person to commit the fraud.” (Moore vs. Ellison, 82
Colo. 478, 261 P. 461 [1927].)
13
Art. 1505. Subject to the provisions of this Title [Title VI, Sales.], where goods are
sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct precluded from denying
the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1) The provisions of any factors’ acts, recording laws, or any other provision of
law enabling the apparent owner of goods to dispose of them as if he were the true owner
thereof;
(2) The validity of any contract of sale under statutory power of sale or under the
order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store, or in fairs, or markets, in accordance
with the Code of Commerce and special laws. (n)
Art. 1506. Where the seller of goods has a voidable title thereto, but his title has not
been avoided at the time of the sale, the buyer acquires a good title to the goods, provided
he buys them in good faith, for value, and without notice of the seller’s defect of title. (n)
Art. 1900
OBLIGATIONS OF THE AGENT
507
Principal’s responsibility for agent’s
misrepresentation.
(1) Within the scope of agent’s authority. — A principal is
subject to liability for loss caused to another by the other’s
reliance upon a deceitful representation of an agent in the course
of his employment if the representation is authorized, or within
the implied authority of the agent to make for the principal, or
apparently authorized, whether the agent was authorized by
him or not to make the representation. (see Mechem, Cases on
the Law of Agency, p. 230.) Thus, an agent empowered to sell
property is presumed to possess the right to make representations
regarding the condition and quality of the subject of the sale as
usually accompany such transactions. (Angerosa vs. The White
Company, 209 N.J.S. 204 [1936].) A principal who has cloaked his
agent with apparent authority is estopped to deny said authority.
Innocent third persons should not be prejudiced if the principal
failed to adopt the needed measures to prevent misrepresentation,
much more so if the principal ratified the agent’s acts beyond
the latter’s authority. (Filipinas Life Assurance Company vs.
Pedroso, 543 SCRA 542 [2008].)
Liability is based upon the fact that the agent’s position
facilitates the consummation of the fraud in that from the point
of view of the third person, the transaction seems regular on its
face and the agent appears to be acting in the ordinary course of
the business confided to him. (Restatement of the Law of Agency,
Sec. 262.)
ILLUSTRATIVE CASES:
1.
Misrepresentation made by agent authorized to sell property.
Facts: An agent authorized to bind a purchaser misrepresented that a small building was wholly on the property, and
that the Standard Oil Company was trying to lease part of the
property.
Issue: Is the principal liable for the misrepresentation?
Held: The principal is liable for the former but not for the
latter misrepresentation. “Authority to exhibit property to
a prospective purchaser is implied authority to identify the
AGENCY
508
Art. 1900
property with reasonable certainty; but not implied authority
to make representations as to a prospective lease of the property.” (Lemarb vs. Power, 275 P. 561 [1929].)
________
________
________
2. Misrepresentation made by agent authorized to receive
subscriptions for stock.
Facts: P (company) employed A to solicit and receive subscriptions for stock. T brought an action for tort for misrepresentation made by A in the sale of stock. P claims that there was
no proof that it had authorized A to make the alleged misrepresentation and had no knowledge that they had been made.
Issue: Is P liable in the action for deceit or fraud of A?
Held: Yes. The natural inquiry of a proposed purchaser
would be directed to the condition and situation of the
company, its officers, and promoters. To give such facts was
necessarily incumbent on A and was strictly in line of his duties,
and, therefore, P is responsible for any misrepresentation in an
action for fraud and deceit. (Jacobson vs. Skinner Packing Co., 118
Neb. 711, 226 N.W. 321 [1929].)
(2) Beyond the scope of agent’s authority. — The principal is
not bound by the misrepresentation of his agent committed
beyond the scope of his authority. It does not follow, however,
that he can take advantage of a contract made under the false
representation of an agent. The theory is that the one who
accepts the benefit of a contract must also accept responsibility
for the means by which such contract was procured.
EXAMPLE:
P employed A to sell a horse but expressly forbade A to
warrant the horse sound. T, induced by the warranty of A,
paid twice the price he would have paid for an unsound horse.
Having discovered the horse to be unsound, T sought rescission
of the sale.
In this case, while P might defend himself upon the ground
of want of authority in A, it by no means follow that he could
at the same time, insist upon enforcing the contract obtained by
means of a false representation made by A, because A had no
authority.
Art. 1901
OBLIGATIONS OF THE AGENT
509
(3) For the agent’s own benefit. — Is a principal responsible
for his agent’s fraudulent acts committed within the scope of
his agency, where the agent’s fraud was perpetrated for his own
benefit? The weight of authority holds the principal liable. Given
the agent’s fraudulent act within the scope of the authority, the
principal is subjected to liability though done by the agent solely
to effect a fraudulent design for his own benefit. (Teller, op. cit.,
pp. 193-194, citing Gleason vs. Seeboard Air Line Ry Co., 278 U.S.
349; Bank of Batevia vs. N.Y.R.R. Co., 106 N.Y. 195; see rule with
respect to principal’s liability for agent’s tort under Art. 1910.)
Similarly, a principal has often been held liable on contracts
entered into by his agent from improper motives, or violations
by the agent of his fiduciary duty, as where an agent with a
general power of attorney to issue checks, issues checks for his
own benefit. (Ibid., p. 194, citing Empire Trust Co. vs. Cahan, 274
U.S. 474; Reinstatement of the Law of Agency, Sec. 165.)
ART. 1901. A third person cannot set up the fact that
the agent has exceeded his powers, if the principal has
ratified, or has signified his willingness to ratify the
agent’s acts. (n)
Ratification by the principal.
(1) Binding effect of ratification. — The principal is not bound
by the contract of his agent should the latter exceed his power. The
contract is unenforceable but only as regards him. Hence, he may
ratify the contract giving it the same effect as if he had originally
authorized it. (see Art. 1910, par. 2.) Under the above article, the
third person cannot set up the fact that the agent exceeded his
authority to disaffirm his contract not only after the principal has
ratified the agent’s acts but even before such ratification where
he has signified his willingness to ratify. In such a case, the third
person can be compelled to abide by his contract.
The ratification shall have retroactive effect. It relates back
to the time of the act or contract ratified and is equivalent to
original authority. (see Board of Liquidators vs. Kalaw, 20 SCRA
987 [1967].)
510
AGENCY
Art. 1901
(2) Only principal can ratify. — It is fundamental in the law of
agency that only the principal and not the agent can stamp the
imprimatur of ratification. There must be knowledge on the part
of the principal of the things he is going to ratify. It can hardly be
said that there was ratification on his part in the absence of proof
that he had knowledge of what was to be ratified. (Brownell vs.
Parreno, [C.A.] No. 16714-R, May 27, 1958, 54 O.G. 7412.) Before
ratification by the principal or expression of willingness on his
part to ratify, the third person may repudiate the act of the agent.
(see Art. 1317.)
In a case, the Supreme Court held that the State cannot
impugn the validity of the compromise agreement executed by
the Solicitor General on behalf of the State (in an expropriation
proceeding) on the ground that it was executed by the counsel of
the owner of the property, without any showing of having been
especially authorized to bind the property thereby, because such
alleged lack of authority may be questioned only by the principal
or client, and the principal has on the contrary confirmed and
ratified the compromise agreement. (Commissioner of Public
Highways vs. San Diego, 31 SCRA 616 [1970].)
(3) Receipt by principal of benefits of transaction. — It is an
established principle of law that where a person acts for another
who accepts or retains the benefits or proceeds of his effort with
knowledge of the material facts surrounding the transaction, the
latter must be deemed to have ratified the methods employed, as
he may not, even though innocent, receive or retain the benefits
and at the same time disclaim responsibility for the measures by
which they were acquired. This is in accord with the principle
to the effect that a principal may not accept the benefits of a
transaction and repudiate its burdens. (2 Am. Jur. 181-182.)
(a) A principal is deemed to have received the benefits
of the unauthorized sale of his property and thereby ratified
the transaction where the checks issued by the buyer in favor
of the principal were credited to the latter’s account with a
bank or endorsed and negotiated by him. (see Rafferty vs.
Province of Cebu, 52 Phil. 548 [1928]; Pamdico [Manila], Inc.
vs. Alto Electronics Corp., [C.A.] No. 14904-R, June 8, 1956.)
Art. 1902
OBLIGATIONS OF THE AGENT
511
(b) A principal who seeks to enforce